Understanding options

What are options?

An option is a contract that represents the right to buy or sell a financial product at an agreed-upon price for a specific period of time. You can typically buy and sell an options contract at any time before expiration.

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.

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?

Whether you're bullish, bearish, or neutral with equities trading, you are limited to buying and selling. Incorporating options into your U.S. investing strategy gives you the ability to implement additional strategies such as:

  • Buying the right to purchase a stock at a specified price between now and a future date.
  • Getting paid to potentially purchase a stock at a discount to its current price. 
  • Protecting a stock in your portfolio from a substantial price decline.
  • Generating income on existing stocks in your portfolio.

What are call options and put options contracts?

Call options
A call option gives the contract owner/holder (the buyer of the call option) the right to buy the underlying stock at a specified strike price by the expiration date Tooltip . Calls are typically purchased when you expect that the price of the underlying stock may go up.

Put options
A put option gives the contract owner/holder (the buyer of the put option) the right to sell the underlying stock at a specified strike price by the expiration date. Puts are typically bought when you expect that the price of the underlying stock may go down.

image of long and short options, and call and put options

Common options strategies

  • Objective 
  • Outlook 
  • Strategy 
  • Description
  • Objective 
    Income generation 
  • Outlook 
    Neutral to bullish 
  • Strategy 
    Covered Call 
  • Description
    Sell a call against an existing stock position
  • Objective 
    Income generation 
  • Outlook 
    Neutral to bullish
  • Strategy 
    Cash-Secured Put
  • Description
    Sell a put, secured by cash set aside in case of assignment
  • Objective 
    Hedging  
  • Outlook 
    Neutral to bearish 
  • Strategy 
    Protective Put
  • Description
    Buy a put on an existing stock position
  • Objective 
    Speculation  
  • Outlook 
    Either direction 
  • Strategy 
    Straddle 
  • Description
    Buy a call and a put at the same strike
  • Objective 
    Speculation  
  • Outlook 
    Either direction 
  • Strategy 
    Debit Spread
  • Description
    Buy and sell calls with different strike prices and/or expirations, or buy and sell puts at the same time

Practice what you learn about options risk-free with paperMoney®.

Built into all thinkorswim platforms, the paperMoney software is a virtual trading environment that allows you to test and refine strategies in a live market simulation—all without risking real funds.

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Why trade options with Schwab?

US$0.65 option contracts1

Online options trades at Schwab have no base commission and low per contract fees.

Robust tools and platforms

Plan and execute strategies on the convenience of web, mobile, or desktop.  

Support from options specialists

Get real-time trade analysis and focused support from options professionals during trading hours. 

Education and expert commentary

Get access to education resources from articles to videos and live webcasts that help you understand the basics of trading options. 

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