Getting started with options
Options: Taking a peek behind the curtain
Since you’ve stumbled across this article, there’s a good chance you’ve heard about options trading (sometimes called equity options, or options, for short), and an even better chance that you’ve been told they’re risky, complex financial instruments better left to professional traders. It’s also a near certainty that someone, somewhere has told you about how much money they’ve made, or lost, trading options. So, let’s dive in.
For all you may have heard, a large part of the risk in trading options (or any financial product) lies with the trader (ie, you take the risk). Options can be confusing if you don’t have much experience with them, and it can be difficult to learn how they work. But here’s the thing—for all their nuances, options are just assets that can be bought and sold.
In fact, options were created as a way to help protect large portfolios or stock positions against collapses in the markets—not to speculate. It was a simple way of transferring a lot of the risk of holding a stock onto someone else, without compromising much of the stock’s existing profit or upside potential.
Today, the three most common uses for options are speculation, income, and protection. Let’s break these down.
- Speculation If you think you know where the market might be going next, you could buy call and put options (“calls” and “puts”) at a fraction of the stock price. Keep in mind, there’s a lot more to trading options than these two strategies, which we’ll cover in another article.
- Income Believe it or not, there are ways to sell options to "collect income" from a stock you already own (or even other options you own). The idea of first “selling high” and then “buying low” might be foreign to you if you’re just starting out, but it exists. Seriously.
- Protection Sometimes you might just need to “head for the exit” and sell a stock you own. Other times, you might set yourself up with a way to help protect your investment before something happens, sort of like how we protect our homes and cars with insurance.
Perhaps the biggest myth is that options are all just high-risk, short-term vices for adrenaline junkies. While there are very short-term options that can expire in as little as a week (more risky), there are also options that expire in nearly three years (not as risky). So, while there’s certainly an appeal for short-term day traders, options can also play nice with long-term investors looking for thoughtful ways to hedge (trader-speak for protect against) market risk or even potentially enhance returns.
Our goal isn’t to preach that one way to trade options is better than another (we couldn’t even if we wanted to). But, we do want to empower you with information to help you find your comfort zone, and help you discover what works best for you. And if options aren’t your cup of tea, that’s ok too.
Ultimately, options can be a powerful financial tool. And with great power comes great responsibility (thanks Spiderman). While we can’t promise that learning about options will make you a successful trader, it can help you become a more aware trader.
Ready to start?
Good. So are we.
Content is provided for informational purposes only, does not constitute tax or investment advice, and is not a recommendation for any security or trading strategy. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results.
Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.
Robinhood Financial does not guarantee favorable investment outcomes. The past performance of a security or financial product does not guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy. Supporting documentation for any claims, if applicable, will be furnished upon request.
The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.