Risk comes from not knowing what you're doing.
Before You Start
Prerequisites
- • Options-approved brokerage account (see approval levels below)
- • Money you can afford to lose (seriously - start small)
- • A real opinion on a stock (not just gambling)
- • Understanding of Lessons 1-6 from this course
Understanding Options Approval Levels
Before you can trade options, your broker must approve your account. Brokers use approval levels (typically 1-4) to determine which strategies you can use. The higher the level, the more complex (and risky) strategies you can access.
| Level | Typical Strategies Allowed | Risk Level |
|---|---|---|
| Level 1 | Covered calls, cash-secured puts | Lower |
| Level 2 | Buying calls and puts (long options) | Moderate |
| Level 3 | Spreads (debit/credit spreads) | Higher |
| Level 4 | Naked options (unlimited risk) | Highest |
How to apply: Most brokers have an "Options" or "Trading Permissions" section in account settings. You'll answer questions about your experience, income, and goals. Be honest — approval is based on your ability to understand the risks.
For beginners: Level 2 is usually sufficient for learning. This lets you buy calls and puts, where your maximum loss is limited to what you pay upfront. Avoid requesting higher levels until you're experienced.
Approval levels vary by broker. Check your broker's specific requirements and terminology.
Step 1: Pick a Liquid Stock
Start with stocks that have high options volume. This ensures tight bid-ask spreads and easy exits.
What Makes an Option Liquid?
High daily options volume (check your broker's data)
Tight bid-ask spreads (ideally under $0.10-0.20)
High open interest across multiple strikes
Stocks or ETFs you've researched and understand
Large-cap stocks and major index ETFs often have high liquidity. Research options based on your own criteria - this is not a recommendation of any specific security.
Avoid for first trades: Penny stocks, meme stocks with crazy volatility, stocks you've never researched, anything with wide bid-ask spreads ($0.50+).
Step 2: Form an Opinion
You need a directional view and a timeframe. Be specific.
| Your View | Option to Buy | Example |
|---|---|---|
| Stock will go UP | Buy Call | "Apple will rise before earnings" |
| Stock will go DOWN | Buy Put | "Tesla will drop after delivery numbers" |
Step 3: Choose Your Expiration
Beginner Rule of Thumb:
Give yourself 2x the time you think you need
Think the move happens in 2 weeks? → Buy a 4-6 week option
Think the move happens in 1 month? → Buy a 2-3 month option
This buffers you against being right but early, and reduces time decay damage.
Step 4: Select Your Strike Price
| Strike Type | Pros | Cons | Best For |
|---|---|---|---|
| Slightly ITM | Higher probability, less volatility | More expensive | First trade, conservative |
| ATM | Balanced, most liquid | Medium cost | Standard directional bet |
| Slightly OTM | Cheaper, bigger % gains | Lower probability | High conviction plays |
Beginner recommendation: Start with ATM or slightly ITM strikes. They're more forgiving and give you room to learn without needing a huge move.
Step 5: Place Your Order
Open the options chain
Find your stock, click "Options" or "Trade Options"
Select expiration date
Click the date tab that matches your timeframe
Click the option you want
Calls on left (bullish), puts on right (bearish)
Use a LIMIT order
Set price at or slightly below the ask. Never use market orders!
Start with 1 contract
You can always add more. Learn with small positions first.
Review and submit
Double-check: right stock, right direction, right date, right price
Step 6: Manage Your Trade
Types of Exit Criteria (Educational Examples):
A predetermined gain level where you plan to exit - varies by strategy and risk tolerance
A predetermined loss level to limit downside - helps manage risk
Exiting before expiration to avoid accelerated time decay - timing varies by strategy
Appropriate exit levels depend on your individual goals, risk tolerance, and strategy. This is educational context, not trading advice.
Hypothetical Example (For Illustration Only)
Example: How a Call Option Trade Might Be Structured
Underlying
A stock trading at $175 (hypothetical)
Trader's View
Expects price increase
Timeframe
Several weeks
Option Type
ATM Call with extended expiration
Cost
Premium paid upfront
Max Risk
Premium paid (defined)
Exit Plan
Predetermined criteria
This is a hypothetical illustration of how options work, not a recommendation. Actual outcomes depend on many factors. Options involve risk of loss.