An option is a contract that gives you the right to buy or sell a financial product at an agreed upon price for a specific period of time.
Options are available on numerous financial products, including equities, indices, and ETFs. Options are called "derivatives" because the value of the option is "derived" from the underlying asset.
When you trade stock, you exchange ownership in a company. By contrast, when you buy or sell option contracts, you are trading the potential, or obligation, to buy or sell the underlying stock. Owning an option, in and of itself, does not impart ownership in the underlying security, nor does it entitle the holder to any dividend payments.
Why trade options?
If you only trade equities, your primary trading strategies are limited to buying the stock if you are bullish or shorting the stock if you are bearish.
By incorporating options into your strategy, you'll get more ways to trade whether you’re bullish, bearish, or even neutral on the market. They include the potential to:
- Lock in the price of a stock for a specified time period without having to commit to buying the stock.
- Buy a stock in the future at a discount to its current price.
- Protect a stock in your portfolio from a substantial price decline.
- Generate income on existing stocks in your portfolio.
It is important to understand that there are risks, costs, and trade-offs along with the potential benefits offered by any option strategy. Be sure you fully understand these aspects before entering into any option strategy.
In order to trade options, you'll also need a brokerage account that's approved for options trading. The types of options trades you can place also depend on your specific options approval level, which is based on a number of suitability factors that can vary from broker to broker.
Calls vs. Puts
A Call option gives the contract owner/holder (the buyer of the Call option) the right to buy the underlying stock at a specified price by the Tooltip . Calls are typically purchased when you expect that the price of the underlying stock may go up.
A Put option gives the contract owner/holder (the buyer of the Put option) the right to sell the underlying stock at a specified price by the expiration date. Puts are typically bought when you expect that the price of the underlying stock may go down.
Common options strategies
Typically, options traders choose a strategy based on their outlook.
ObjectiveIncome generation>OutlookNeutral to bullish>StrategyCovered Call>DescriptionSell a call against an existing stock position>
ObjectiveIncome generation>OutlookNeutral to bullish>StrategyCash-Secured Equity Put>DescriptionSell a put, secured by cash set aside in case of assignment>
ObjectiveHedging>OutlookNeutral to bearish>StrategyProtective Put>DescriptionBuy a put on an existing stock position>
ObjectiveSpeculation>OutlookEither direction>StrategyStraddle>DescriptionBuy a call and a put at the same strike>
ObjectiveSpeculation>OutlookEither direction>StrategyDebit Spread>DescriptionBuy and sell a call at the same time, or buy and sell a put at the same time>
Why trade options with Schwab?
$0.65 option contracts¹
Online options trades at Schwab have no base commission and low per contract fees.
Plan and execute strategies on the convenience of web, mobile, or advanced software.
Get real-time trade analysis and focused support from options professionals during trading hours.
Each trading day, review Today's Options Market Update from Schwab.
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