How to Trade Options for Beginners Using Covered Calls

TL;DR

To trade options as a beginner, start with covered calls, which involve selling call options on stocks you already own. This strategy can generate income while limiting risk, as it allows you to collect premium income and potentially profit from stock appreciation. Make sure you understand the key components, including strike prices and expiration dates, to effectively manage your trades.

Transcript

If you're looking to trade options, or even if you're just curious about what options are, you've come to the right place. By the end of this video, you'll understand how options work and know how to place your first options trade on the thinkorswim® trading platform. We're going to walk you through step by step on how to place your first options t... Read More

Key Insights

• 🙃 Options allow investors to profit from stocks without owning them, offering various strategies with customizable risk levels.
• 🧑‍🏭 Option contracts have factors such as time to expiration, volatility, and the price of the underlying asset that influence their value.
• 🤙 Covered calls can be used to generate income by selling call options on stock already owned, with the potential for the stock to be called away if it reaches the strike price.

Questions & Answers

Q: What are the two main types of options?

The two main types of options are calls and puts. Calls give the option buyer the right to buy the underlying asset, while puts give the option buyer the right to sell the underlying asset.

Q: How does buying a call option differ from selling a call option?

Buying a call option is bullish, as the buyer hopes the stock price will go up and they can purchase the underlying asset at a lower price. Selling a call option is typically bearish, as the seller receives a premium but has the obligation to sell the underlying asset at a specific price if the option buyer exercises their right.

Q: What factors affect the value of an option?

The price of the underlying asset, time to expiration, and implied volatility are the main factors that affect the value of an option. Higher priced underlying assets, longer time to expiration, and higher implied volatility generally increase the value of the option.

Q: What is a covered call strategy?

A covered call strategy involves selling call options on stock you already own. The goal is to generate income by collecting the premium from selling the call option, while potentially having the stock called away if the stock price reaches the strike price.

Summary & Key Takeaways

• Options are contracts that give the owner the right to buy or sell a specified number of shares of a stock, ETF, or other underlying asset at a certain price by a certain date.

• Options can be used to speculate, hedge, or generate income, and offer a wide range of risk levels and probability of success.

• Buying a call option is bullish, allowing the option buyer to buy the underlying asset at a certain price, while buying a put option is bearish, allowing the option buyer to sell the underlying asset at a certain price.