
Investing with options— an advanced trader will tell you— is all about customization. Rewards can be high — but so can the risk— and your choices are plenty. But getting started isn’t easy, and there is potential for costly mistakes. Here’s a brief overview of option trading that cuts through the jargon and gets right to the core of this versatile way to invest.
Option trading is for the DIY investor.
Typically, option traders are self-directed investors, meaning they don’t work directly with a financial advisor to help manage their options trading portfolio. As a do-it-yourself (DIY) investor, you are in full control of your trading decisions and transactions. But that doesn’t mean you’re alone.
There are plenty of communities that bring traders together to discuss things like current market outlook and option trading strategies.
Listen to the latest episode of the Options Playbook Radio, attend one of our free, weekly options trading webinars, or ask Brian Overby, our “options guy,” anything by emailing him directly.
Most beginners start with stock options.
Options based on equities, more commonly known as “stock options,” typically are a natural lead for traders new to options. Stock options are listed on exchanges like the NYSE in the form of a quote. It is important to understand the details of a stock option quote before you make a move— like the cost and expiration date.
To help you get started, here’s the anatomy of a stock option quote.

As you can see in the example above, the stock option quote provides detailed information in compact form. Once you know what each segment represents, you can understand important details of the option contract— including the type, cost, and expiration date— at a glance.
There are different types of options.
Options are contracts that give the owner the right to buy or sell an asset at a fixed price for a specific period of time. That period could be as short as a day or as long as a couple of years, depending on the type of option contract. Fortunately, there are only two types of standard option contracts: a call and a put.
A call option contract gives the owner the right to purchase 100 shares of a specified security at a specified price within a specified time frame.
A put option contract gives the owner the right to sell 100 shares of a specified security at a specified price within a specified time frame.
It’s important to note, for both types of option contracts— a call or put— the owner is not obligated to exercise his or her right to buy or sell.
Options trade on different underlying securities.
Options can be used in many ways – to speculate or to reduce risk— and trade on several different kinds of underlying securities. The most common underlying securities are equities, indexes, or ETFs (Exchange Traded Funds).
There are quite a few differences between options based on indexes versus those based on equities and ETFs. It’s important to know the differences before you start trading.
Option trading is all about calculated risk.
If statistics and probability are in your wheelhouse, chances are volatility and trading options will be, too. As an individual trader, you really only need to concern yourself with two forms of volatility: historical volatility and implied volatility.
Historical volatility represents the past and how much the stock price fluctuated on a day-to-day basis over a one-year period.
Implied volatility is based on what the marketplace is “implying” the volatility of the stock will be in the future, over the life of the option contract.
Implied volatility is one of the most important concepts for option traders to understand because it can help you determine the likelihood of a stock reaching a specific price by a certain time. It can also help show how volatile the market might be in the future.
Option traders speak their own lingo.
When trading options, you can buy a call or sell a put. You can be long or short—and neither has anything to do with your height. Consequently, you can also be in-the, at-the, or out-the-money. Those are just a few of many commonly used words you’ll hear in a room full of option traders.
Simply put, it pays to get your terminology straight. That’s why we decided to create an option trading glossary to help you keep track of it all.
Option traders borrow from the Greeks.
We’re not talking about Aphrodite and Zeus. Options traders use the Greek Alphabet to reference how option prices are expected to change in the market, which is critical to success when trading options. The most common ones referenced are Delta, Gamma, and Theta.
Although these handy Greek references can help explain the various factors driving movement in option pricing and can collectively indicate how the marketplace expects an option’s price to change, the values are theoretical in nature. In other words, there is never a 100% guarantee that these forecasts will be correct.
Option trading starts with your financial goals.
Just like many successful investors, options traders have a clear understanding of their financial goals and desired position in the market. The way you approach and think about money, in general, will have a direct impact on how you trade options. The best thing you can do before you fund your account and start trading is to clearly define your investing goals.
Learn More About Ally Options Trading
Comment on this article
Comments
Evans on April 8, 2018 at 7:48am
This was an awesome article. I didn't know anything about Option Trades, and this was clean head start to gaining the knowledge to pursue this new venture in my life.
Ally on April 9, 2018 at 9:36am
We love hearing this, Evans! Thanks for leaving that feedback and let us know if you need any further help getting started. We're here to help!
Andrew on September 11, 2018 at 11:18pm
Thanks for this clear and simple explanation. I have a question and I can’t find the answer anywhere. Let’s say you buy a call option and immediately feel that it’s not going to hit the strike price. Are you able to ‘sell to close’ below the strike but for a loss?
Andrew on September 11, 2018 at 11:24pm
To add to above, what I mean is let’s say you pay the 3.15 premium, and want to sell the option when the contract is only worth say 2.00? Can you do that if you don’t think it will hit the strike by expiration.
jack on September 22, 2018 at 11:21am
it was very insightful
Francis on December 11, 2018 at 12:45pm
Thanks you and it very helpful
Sathish on December 14, 2018 at 12:35pm
Nice article
Abhishek Y. on February 20, 2019 at 9:51am
i didn't read anything just your example made me understand each and everything. thank you soo much
Ally on February 25, 2019 at 11:20am
We love hearing that this was helpful to you, Abhishek. Thanks for the feedback!
Mohamed Y. on April 18, 2019 at 7:15pm
Very helpful
Ally on April 22, 2019 at 11:22am
Hi Mohamed, we appreciate your feedback. Thanks for reading! 😊
Imran B. on June 13, 2019 at 7:25pm
Explain to me in ciear English what is optional trading
Ally on June 21, 2019 at 12:16pm
Options are contracts giving the owner the right to buy or sell an asset at a fixed price (called the “strike price”) for a specific period of time. That period of time could be as short as a day or as long as a couple of years, depending on the option. The seller of the option contract has the obligation to take the opposite side of the trade if and when the owner exercises the right to buy or sell the asset. For more information, check out the Ally Invest Options Playbook here: https://www.optionsplaybook.com/
Krasnak on December 19, 2019 at 2:11pm
If this guide taught you anything new, you should not be trading options.
KEVIN K. on December 21, 2019 at 11:10am
ITS A GOOD START ON MY WAY TO FINED OUT MORE BEFORE I JUMP IN .
Ally on December 30, 2019 at 12:41pm
Thanks for reading Kevin. Good luck. 😊
DDD on February 10, 2020 at 3:34pm
I studies option in 4 years in univeristy, how to calculate and stuff. Today I start to realized what I have really learned
Ally on March 2, 2020 at 1:58pm
Thanks for reading. 😊
David D. on March 19, 2020 at 4:29pm
Total waste of time
Ed on May 10, 2020 at 8:42am
This article is a great start for anyone wanting to become familiar with the basics of option trading. More articles like these would be of benefit to many of your customers/clients.
Ally on May 10, 2020 at 4:25pm
Hi Ed, thanks for the comment.
Rao K. on July 19, 2020 at 4:40pm
Excellent teaching for a beginner
Ally on July 19, 2020 at 5:24pm
Thanks for the comment, Rao! We appreciate it.
Bonnie on August 18, 2020 at 7:14pm
Clear, concise explanations of the terminology. Looking forward to learning more.
Ally on August 18, 2020 at 7:19pm
Hi Bonnie, thanks for the comment. We’re happy to hear you found this article helpful.
The e. on September 14, 2020 at 11:50pm
Good article, beginner's guide to understanding option trading. I find this article informative and educative at the same time.
Ally on September 18, 2020 at 10:02am
Great to hear! Thanks for the comment.
emmanue, c. on October 20, 2020 at 6:47pm
n/a
KC on December 3, 2020 at 5:57am
This is a good article, it will be a better if you include a few examples to illustrate
Comfortable on January 4, 2021 at 12:40am
Any chance Ally allows beginners to 'paper trade' options? Get some experience without risking actual money? (or are you aware of any?) Thanks.
Ally on January 4, 2021 at 9:00am
Hi, a team member would be happy to further advise, if you’ll give us a call at 1-855-880-2559.
Lucas on January 4, 2021 at 9:01pm
I like stocks