How to Trade Options: Strategies, Calculators and Examples
Interested in trading options? This quick-start guide covers how to open an options account, basic strategies, plus examples and calculators to help you get started.
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Updated · 12 min read
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Writer Trading stock options can be complex — even more so than stock trading. When you buy a stock, you decide how many shares you want, and your broker fills the order at the prevailing market price or a limit price you set.
Trading options, on the other hand, requires an understanding of advanced strategies, often involves large blocks of shares and may involve a substantial amount of money. Buying or selling them can lead to significant gains or losses, and contracts often have many moving parts. Opening an options trading account can also involve a few extra steps compared to a standard brokerage account.
Still, according to the Options Clearing Corporation, options remain a popular investing strategy. In 2025, there were 15.3 billion options contracts traded, up 24.3% compared with the previous year.
While some investors are drawn to options as a way to make quick profits, that’s not how they’re best used, according to many experts. “You can use options to speculate and to gamble, but the reality is ... the best use of options is to protect your downside,” says Randy Frederick, former managing director of trading and derivatives with the Schwab Center for Financial Research. "Options are one way to generate income when the markets aren’t going up.”
Below, we’ve put together a comprehensive guide to options trading, including how to get started, an overview of common strategies, useful calculators and more.
» Need to back up a bit? See our guide to options trading terms and definitions
How to get started trading options in four steps
1. Open an options trading account
Before you can start trading options, you’ll have to prove you know what you’re doing. Compared with opening a brokerage account for stock trading, opening an options trading account requires more capital. And, given the complexity of predicting multiple moving parts, brokers need to know a bit more about a potential investor before giving them a permission slip to start trading options.
Wendy Moyers, a certified financial planner at Chevy Chase Trust in Bethesda, Maryland, says people who know the market well and have time to watch it are better suited to options trading than beginner investors. "It’s definitely more complicated, and you have to be on top of it all throughout the trading day," she says.
Brokerage firms screen potential options traders to assess their trading experience, understanding of the risks, and financial preparedness. These details will be documented in an options trading agreement submitted to the prospective broker for approval. You’ll need to provide your:
- Investment objectives. This usually includes income, growth, capital preservation or speculation.
- Trading experience. The broker will want to know your knowledge of investing, how long you’ve been trading stocks or options, how many trades you make per year and the size of your trades.
- Personal financial information. Have on hand your liquid net worth (or investments that can be easily sold for cash), annual income, total net worth and employment information.
- The types of options you want to trade. For instance, calls or puts, and whether you want to buy and resell or write (originate) options, "covered" or "naked." The seller or writer of options has an obligation to deliver the underlying stock if the option is exercised. If the writer also owns the underlying stock, the option position is covered. If the option position is left unprotected, it's naked.
Based on your answers, the broker typically assigns you an initial trading level based on risk (typically 1 to 5, with 1 being the lowest and 5 the highest). This is your key to placing certain types of options trades.
Screening should go both ways, however. The broker you choose to trade options with is your most important investing partner. Finding a broker that offers the tools, research, guidance, and support you need is especially important for investors new to options trading.
» Ready to get started? See our list of the best brokers for options trading
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2. Pick which options to buy or sell
As a refresher, a call option is a contract that gives you the right, but not the obligation, to buy a stock at a predetermined price — called the strike price — within a certain time period. A put option gives you the right, but not the obligation, to sell shares at a stated price before the contract expires.
Which direction you expect the underlying stock to move determines what type of options contract you might take on:
- If you think the stock price will move up: buy a call option or sell a put option.
- If you think the stock price will stay stable: sell a call option or sell a put option.
- If you think the stock price will go down: buy a put option or sell a call option.
Frederick says to think of options like an insurance policy: You don’t get car insurance hoping that you crash your car. You get car insurance because no matter how careful you are, sometimes crashes happen. "You buy options hoping you don’t need them,” he says.
» Want some practice before getting started? Here are the brokerages that offer free paper trading accounts.
3. Predict the option strike price
When buying an option, it remains valuable only if the stock price closes the option’s expiration period “in the money.” That means either above or below the strike price. (For call options, it’s above the strike; for put options, it’s below the strike.) You’ll want to buy an option with a strike price that reflects where you predict the stock will be during the option’s lifetime.
You can’t choose just any strike price. Option quotes, technically called an option chain or matrix, contain a range of available strike prices. The increments between strike prices are standardized across the industry — for example, $1, $2.50, $5, $10 — and are based on the stock price.
The price you pay for an option, called the premium, has two components: intrinsic value and time value. Intrinsic value is the difference between the strike price and the share price, if the stock price is above the strike. Time value is whatever is left, and factors in how volatile the stock is, the time to expiration and interest rates, among other elements. For example, suppose you have a $100 call option while the stock costs $110. Let’s assume the option’s premium is $15. The intrinsic value is $10 ($110 minus $100), while time value is $5.
This leads us to the final choice you need to make before buying an options contract.
4. Determine the option time frame
Every options contract has an expiration date indicating the last day you can exercise the option. Here, too, you can’t just pull a date out of thin air. Your choices are limited to the ones offered when you call up an option chain.
There are two styles of options: American and European, which differ based on when the option contract can be exercised. Holders of an American option can exercise at any point up to the expiry date, whereas holders of European options can only exercise on the day of expiry. Since American options offer more flexibility for the option buyer (and more risk for the option seller), they usually cost more than their European counterparts.
Expiration dates can range from days to months to years. Daily and weekly options tend to be the riskiest and are reserved for seasoned option traders. For long-term investors, monthly and yearly expiration dates are preferable. Longer expirations give the stock more time to move and time for your investment thesis to play out. As such, the longer the expiration period, the more expensive the option.
A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price. An option’s time value decays as expiration approaches, and options buyers don’t want to watch their purchased options decline in value, potentially expiring worthless if the stock finishes below the strike price. If a trade has gone against them, they can usually still sell any time value remaining on the option — and this is more likely if the option contract is longer.
5 options trading strategies
Below is a set of five common options trading maneuvers explained by James Royal, Ph.D., an options trading expert, book author and former NerdWallet writer.
1. The long call
The long call is an options strategy where you buy a call option, or “go long.” This straightforward strategy is a wager that the underlying stock will rise above the strike price by expiration.
Example: XYZ stock trades at $50 per share, and a call at a $50 strike is available for $5 with an expiration in six months. The contract is for 100 shares, which means this call costs $500: the $5 premium x 100. Here’s the payoff profile of one long call contract.
| Stock price at expiration | Long call's profit |
|---|---|
| $80 | $2,500 |
| $70 | $1,500 |
| $60 | $500 |
| $55 | $0 |
| $50 | -$500 |
| $40 | -$500 |
| $30 | -$500 |
| $20 | -$500 |
Potential upside/downside: If the call is well-timed, the upside on a long call is theoretically infinite, until the expiration, as long as the stock moves higher. Even if the stock moves the wrong way, traders often can salvage some of the premium by selling the call before expiration. The downside is a complete loss of the premium paid — $500 in this example.
Why use it: If you’re not concerned about losing the entire premium, a long call is a way to wager on a stock rising and to earn much more profit than if you owned the stock directly. It can also be a way to limit the risk of owning the stock directly. For example, some traders might use a long call rather than owning a comparable number of shares of stock because it gives them upside while limiting their downside to just the call's cost — versus the much higher expense of owning the stock — if they worry a stock might fall in the interim.
2. The long put
The long put is similar to the long call, except that you’re wagering on a stock’s decline rather than its rise. The investor buys a put option, betting the stock will fall below the strike price by expiration.
Example: XYZ stock trades at $50 per share, and a put at a $50 strike is available for $5 with an expiration in six months. In total, the put costs $500: the $5 premium x 100 shares. Here’s the payoff profile of one long put contract.
| Stock price at expiration | Long put's profit |
|---|---|
| $80 | -$500 |
| $70 | -$500 |
| $60 | -$500 |
| $50 | -$500 |
| $45 | $0 |
| $40 | $500 |
| $30 | $1,500 |
| $20 | $2,500 |
Potential upside/downside: The long put is worth the most when the stock is at $0 per share, so its maximal value is the strike price x 100 x the number of contracts. In this example, that’s $5,000. Even if the stock rises, traders can still sell the put and often save some of the premium, as long as there’s some time to expiration. The maximum downside is a complete loss of the premium, or $500 here.
Why use it: A long put is a way to wager on a stock’s decline, if you can stomach the potential loss of the whole premium. If the stock declines significantly, traders will earn much more by owning puts than they would by short-selling the stock. Some traders might use a long put to limit their potential losses, compared with short-selling, where the risk is uncapped because theoretically a stock’s price could continue rising indefinitely and a stock has no expiration.
3. The short put (or cash-secured put)
The short put is the opposite of the long put, with the investor selling a put, or “going short.” This strategy wagers that the stock will stay flat or rise until the expiration, with the put expiring worthless and the put seller walking away with the whole premium. Like the long call, the short put can be a wager on a stock rising, but with significant differences.
Example: XYZ stock trades at $50 per share, and a put at a $50 strike can be sold for $5 with an expiration in six months. In total, the put is sold for $500: the $5 premium x 100 shares. The payoff profile of one short put is exactly the opposite of the long put.
| Stock price at expiration | Short put's profit |
|---|---|
| $80 | $500 |
| $70 | $500 |
| $60 | $500 |
| $50 | $500 |
| $45 | $0 |
| $40 | -$500 |
| $30 | -$1,500 |
| $20 | -$2,500 |
Potential upside/downside: Whereas a long call bets on a significant increase in a stock, a short put is a more modest bet and pays off more modestly. While the long call can return multiples of the original investment, the maximum return for a short put is the premium, or $500, which the seller receives upfront.
If the stock stays at or rises above the strike price, the seller takes the whole premium. If the stock sits below the strike price at expiration, the put seller is forced to buy the stock at the strike, realizing a loss. The maximum downside occurs if the stock falls to $0 per share. In that case, the short put would lose the strike price x 100 x the number of contracts, or $5,000.
Why use it: Investors often use short puts to generate income, selling the premium to other investors who are betting that a stock will fall. Like someone selling insurance, put sellers aim to sell the premium and not get stuck having to pay out. However, investors should sell puts sparingly, because they’re on the hook to buy shares if the stock falls below the strike at expiration. A falling stock can quickly eat up any of the premiums received from selling puts.
Sometimes investors use a short put to bet on a stock’s appreciation, especially since the trade requires no immediate outlay. But the strategy’s upside is capped, unlike a long call, and it retains more substantial downside if the stock falls.
Investors also use short puts to achieve a better buy price on a too-expensive stock, selling puts at a much lower strike price, where they’d like to buy the stock. For example, with XYZ stock at $50, an investor could sell a put with a $40 strike price for $2, then:
- If the stock dips below the strike at expiration, the put seller is assigned the stock, with the premium offsetting the purchase price. The investor pays a net $38 per share for the stock, or the $40 strike price minus the $2 premium already received.
- If the stock remains above the strike at expiration, the put seller keeps the cash and can try the strategy again.
4. The covered call
The covered call starts to get fancy because it has two parts. The investor must first own the underlying stock and then sell a call on the stock. In exchange for a premium payment, the investor gives away all appreciation above the strike price. This strategy wagers that the stock will stay flat or go just slightly down until expiration, allowing the call seller to pocket the premium and keep the stock.
If the stock sits below the strike price at expiration, the call seller keeps the stock and can write a new covered call. If the stock rises above the strike, the investor must deliver the shares to the call buyer, selling them at the strike price.
One critical point: For each 100 shares of stock, the investor sells at most one call; otherwise, the investor would be short “naked” calls, with exposure to potentially uncapped losses if the stock rose. Nevertheless, covered calls transform an unattractive options strategy — naked calls — into a safer and still potentially effective one, and it’s a favorite among investors looking for income.
Example: XYZ stock trades at $50 per share, and a call at a $50 strike can be sold for $5 with an expiration in six months. In total, the call is sold for $500: the $5 premium x 100 shares. The investor buys or already owns 100 shares of XYZ.
| Stock price at expiration | Call's profit | Stock's profit | Total profit |
|---|---|---|---|
| $80 | -$2,500 | $3,000 | $500 |
| $70 | -$1,500 | $2,000 | $500 |
| $60 | -$500 | $1,000 | $500 |
| $55 | $0 | $500 | $500 |
| $50 | $500 | $0 | $500 |
| $45 | $500 | -$500 | $0 |
| $40 | $500 | -$1,000 | -$500 |
| $30 | $500 | -$2,000 | -$1,500 |
| $20 | $500 | -$3,000 | -$2,500 |
Potential upside/downside: The maximum upside of the covered call is the premium, or $500, if the stock remains at or just below the strike price at expiration. As the stock rises above the strike price, the call option becomes more costly, offsetting most stock gains and capping upside. Because upside is capped, call sellers might lose a stock profit that they otherwise would have made by not setting up a covered call, but they don’t lose any new capital. Meantime, the potential downside is a total loss of the stock’s value, less the $500 premium, or $4,500.
Why use it: The covered call is a favorite of investors looking to generate income with limited risk while expecting the stock to remain flat or slightly down until the option’s expiration.
Investors can also use a covered call to receive a better sell price for a stock, selling calls at an attractive higher strike price, at which they’d be happy to sell the stock. For example, with XYZ stock at $50, an investor could sell a call with a $60 strike price for $2, then:
- If the stock rises above the strike at expiration, the call seller must sell the stock at the strike price, with the premium as a bonus. The investor receives a net $62 per share for the stock, or the $60 strike price plus the $2 premium already received.
- If the stock remains below the strike at expiration, the call seller keeps the cash and can try the strategy again.
5. The married put
Like the covered call, the married put is a little more sophisticated than a basic options trade. It combines a long put with owning the underlying stock, “marrying” the two. For each 100 shares of stock, the investor buys one put. This strategy allows an investor to continue owning a stock for potential appreciation while hedging the position if the stock falls. It works similarly to buying insurance, with an owner paying a premium for protection against a decline in the asset.
Example: XYZ stock trades at $50 per share, and a put at a $50 strike is available for $5 with an expiration in six months. In total, the put costs $500: the $5 premium x 100 shares. The investor already owns 100 shares of XYZ.
| Stock price at expiration | Put's profit | Stock's profit | Total profit |
|---|---|---|---|
| $80 | -$500 | $3,000 | $2,500 |
| $70 | -$500 | $2,000 | $1,500 |
| $60 | -$500 | $1,000 | $500 |
| $55 | -$500 | $500 | $0 |
| $50 | -$500 | $0 | -$500 |
| $45 | $0 | -$500 | -$500 |
| $40 | $500 | -$1,000 | -$500 |
| $30 | $1,500 | -$2,000 | -$500 |
| $20 | $2,500 | -$3,000 | -$500 |
Potential upside/downside: The upside depends on whether the stock goes up or not. If the married put allowed the investor to continue owning a stock that rose, the maximum gain is potentially infinite, minus the premium of the long put. The put pays off if the stock falls, generally matching any declines and offsetting the loss on the stock minus the premium, capping downside at $500. The investor hedges losses and can continue holding the stock for potential appreciation after expiration.
Why use it: It’s a hedge. Investors use a married put if they’re looking for continued stock appreciation or are trying to protect gains they’ve already made while waiting for more.
Options trading calculators
How much money can you make (or lose) buying put and call options? We've built two calculators that can help you estimate your profits or losses from a theoretical option trade.
- The first estimates the value of an option contract at a given point in time, based on the Black-Scholes options pricing formula.
- The second calculates your profit or loss based on your estimated purchase and resale price of an option contract.
Instructions for using NerdWallet's options trading calculators
First, estimate the purchase price of the option contract by running the calculator with the underlying stock's current market price and the current number of months until the option expires. Make sure that "no" is selected in the dropdown menu about estimating the option's price at expiration.
Copy the resulting put or call price (depending on which one you're buying) and paste it into the profit/loss calculator below.
Second, estimate the sale or expiry price of the option contract by running the calculator again with the underlying stock's expected market price at resale and the number of months remaining until expiration when you expect to resell the option. If you want to estimate your profit or loss from exercising the option, you can enter the stock's expected market price at expiration and select "yes" in the dropdown menu.
You can also adjust the volatility, dividend yield and risk-free rate, if you expect these to change between purchase and sale or expiration.
Copy and paste the resulting put or call price into the profit/loss calculator below.
Third, enter your number of contracts below, and your top income tax bracket, and click "Calculate." This will display your total estimated profit or loss from your option trade, in both dollar and percentage terms, as well as your after-tax profit or loss and your taxes due or deductible losses (for option trades in a taxable brokerage account).
Head's up: To estimate your profit or loss from buying and then reselling or exercising an option, you'll need to run the options pricing calculator above twice and enter the results into the profit/loss calculator below.
Naked sales and zero-day options: Not for beginners
In addition to the five strategies explained above by Dr. James Royal, we wanted to mention some strategies that are not appropriate for beginners due to their high risk levels.
Naked option sales occur when someone writes an option without owning enough collateral to meet their obligations if the option is exercised. (This collateral typically means 100 shares of the underlying stock in the case of calls, or enough cash to buy 100 shares of the underlying stock at the strike price in the case of puts).
Selling naked options is extremely risky because if it goes wrong, your losses are potentially unlimited, and your account will be debited a large amount of money upfront. In some cases, unsuccessful naked option sales can push investors' account balances into negative territory, meaning they owe money to their broker. As a result, many brokers disallow or severely restrict naked option sales.
Zero-day options, also known as 0DTE options, are puts or calls that expire in less than one day, hence the name ("0DTE" stands for "zero days to expiration.")
Trading zero-day options is an extremely risky strategy due to its short-term, everything-or-nothing, gambling-like nature. Options sometimes experience big price swings on their last day of trading, but many simply go to zero.
» Ready to jump in? NerdWallet's best brokers for options
Bottom line: Pros and cons of options trading in practice
"The pros are you could make a little bit extra money on investing in the short term," Moyers says. "The con is you could lose everything, depending on how you structure your options trading."
Once you have learned the strategies and are willing to put in the time, there are several upsides to options trading, Frederick says. For instance, you can use a covered call to help you generate income in a sideways market.
Frederick says most covered calls are sold out of the money, which generates income immediately. If the stock falls slightly, goes sideways, or rises slightly, the options will expire worthless with no further obligation, he says. If the stock rises and is above the strike price when the options expire, the stock will be called away at a profit in addition to the income gained when the options were sold.
Here are a few other benefits and drawbacks to consider:
Advantages:
- Cheaper than stocks (sometimes). Investors can get started with options using less capital than may be required for stock trading. That’s because the premium for purchasing a contract (i.e., a bundle of stocks) can be lower than purchasing the same number of shares of a stock upfront. That said, options contracts generally control 100 shares of the underlying stock, so the cheapness argument may not apply for small-balance investors who are accustomed to buying fractional shares of stocks for a few dollars.
- Low risk, high reward (sometimes). In an ideal world, option holders can magnify their wins by placing smart bets, but contracts can, and sometimes do, expire worthless. Although the loss will be limited to your initial investment, it’s still a net negative. Selling an option — assuming you have enough cash or shares to meet your obligations if the option is exercised — is also a relatively low-risk way to generate income (although it's very high-risk if you don't.
- Insurance policy. If a holder purchases a contract that inversely reacts to a stock they own, this can help them hedge against potential losses should the underlying stock price drop. Writing options also allows investors to lock in a fixed purchase price (for puts) or selling price (for calls), which can feel more predictable than simply buying and selling at market price. Plus, it generates some income from the premium the writer collects.
Disadvantages:
- Educational investment. Options trading requires a certain commitment to mastering vocabulary, jargon and options strategies to trade knowledgeably. If you’re new to investing or prefer a hands-off approach, this type of trading may feel overwhelming.
- High risk for sellers and some additional costs. Writers of contracts can expose themselves to sizable risk — such as theoretically unlimited losses — if they're writing options without enough cash or shares to meet their contract obligations. Meanwhile, holders may also be asked to set up margin accounts to trade, which carry additional fees, such as interest charges.
- Taxes. When it comes to stocks, you can generally choose how long to hold on to an asset before selling. This allows you to be more strategic about the type of capital gains tax rate your profits will see. With options’ shorter timelines, the profits you make will likely be considered short-term gains, which are taxed at a less favorable rate. With some careful planning, though, you may be able to tap into other tax strategies, such as tax-loss harvesting, to minimize or offset your liability.
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- 1. OCC. OCC Annual 2025 and December 2025 Volume. Accessed Mar 10, 2026.
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