How to trade options: 7 steps from account approval to your first contract

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Placing an options trade looks a lot like buying a stock. You pick a ticker, type in a quantity, and tap a button. The options ticket just adds a few extra choices first, and each one changes what you're agreeing to.

These choices decide whether you expect the stock's price to rise or fall, by how much, and when. Let's walk through your first options trade, from account approval to expiration day, one decision at a time.

An option is a contract that lets you lock in a price to buy or sell a stock for a limited time. A call locks in a buying price. A put locks in a selling price.

Traders label the locked-in price the strike price, and the up-front fee you pay for the contract is the premium. Every contract also carries an expiration date, the deadline after which it stops existing, meaning you can't exercise it to buy or sell at the strike price.

Explore options contracts with AlphaSpace

Standard options on stocks and exchange-traded funds (ETFs) cover 100 shares per contract. The premium you pay is per share, so a $2 quote costs $200 for one contract. If prices move far enough in your favor before expiration, the contract can pay off. If they don't, you can let it expire and only lose the premium.

Buying and selling contracts split this market into two roles. A buyer pays the premium and gets a choice to exercise the contract at the strike price or let it expire. A seller collects that premium and takes on the opposite obligation, buying shares from the buyer or selling them shares at the price the contract locked in, if they decide to exercise it.

Learn more: What are options, and how do they work?

Almost every broker walks you through the same basic sequence once you decide to trade options. The screens might look different depending on where you have your account, but the order behind them barely changes. Here's how it typically breaks down.

A regular brokerage account doesn't include options, so you'll need to apply for access to the options market. The application typically opens with a few questions about your trading experience, income, and net worth, and what you plan to use options for.

Based on your answers, the broker decides whether options fit your account. Approval times vary by broker. Schwab, for example, emails applicants a decision within three business days, while Robinhood approved my account almost instantly.

If your broker approves you, it'll assign you an approval level that decides which trades your account can place. Brokers commonly offer around five tiers from lowest to highest risk, though the count varies by firm. Lower levels typically include buying calls and puts, while higher levels can add more complex and potentially riskier strategies like selling contracts on stock you don't own.

Every option tracks an underlying asset, such as a stock or an ETF. You don't need to own the asset itself to buy calls or puts on it. ETFs work the same way. The contract just tracks the fund's price instead of one company's stock.

Owning shares only asks you to believe a company or fund improves over time. Options ask for a sharper stance, one that covers both price and timing, since the contract only pays off if you're right about both. A vague hunch that a stock will eventually rise may not fit inside an option contract deadline.

Heavily traded stocks and ETFs tend to have busier options markets, and that keeps prices fairer. It also makes it easier to sell your contract to someone else before it expires.

As an example, I picked Dolby (DLB), a well-known audio equipment company. Its stock was trading near $50 when I checked after a year-long downtrend. With options approval now on my account, a "Trade DLB options" button appeared right under the stock's price window.

You'll see an options chain table showing all the available options contracts for a particular stock, organized in one view. On most platforms, expiration dates sit across the top, and strike prices run down the middle, split into calls on one side and puts on the other.

Using the simplified view, I priced up a call on Dolby when the stock traded at $49.74 on July 21, 2026. The $60 call expiring in 31 days had a premium of $2.40 a share, for an estimated cost of $240.04 after regulatory and exchange fees. Buying it means paying for the right to buy 100 shares of Dolby at $60 each, no matter how high the stock climbs before the contract expires.

If Dolby trades at $70, I can buy its shares for $60 and stand to make a profit from the difference. If I hold the contract through expiration and Dolby never clears $60, it expires worthless, and I lose the premium.

This is where your opinion turns into a contract. A call gives its buyer the right to buy 100 shares at a set strike price. Calls can pay off when the stock climbs above that price.

A put works the other way. It gives its buyer the right to sell 100 shares at the strike price, so it can pay off when the stock falls. Puts can also protect shares you already own, working like insurance that locks in a floor price for a fee.

Two choices you control help shape a contract's price: how far the strike sits from the stock's price, and how much time is left until expiration.

Dolby's options chain shows this in action. Under the 31-day expiration, the closer a strike is to the stock's price, the more the contract costs since it takes a smaller move to pay off.

If the strike is below the stock's price, like Dolby's $45 call, the premium goes higher still. That contract already carries value even if the stock never moves another cent.

Expiration works on the same logic. A longer window typically costs more, since the stock has more room to reach the strike. That same stretch of time works against you once the clock starts running. All else equal, a contract's value falls as time passes, and the drag often speeds up as expiration nears. Traders refer to this as time decay.

To calculate the cost of each option, multiply the ask or bid price by the 100 shares each contract covers. Brokers may also add their own per-contract fee. For example, Schwab and Fidelity charge $0.65 per contract, while Robinhood doesn't charge a fee, but it passes through a $0.04 regulatory fee for each contract.

Dolby's $60 call asked for $2.40 per share. Multiply that by the 100 shares each contract covers, add any regulatory and exchange fees,to get your total cost. Two contracts would run around $480.08 and so on.

That $240.04 premium raises the bar for profit. The $60 strike marks where the contract begins carrying potential value, but the $2.40 you paid per share needs to come back first. Add the two together, and Dolby needs to clear $62.40 before the trade actually turns a profit, a move of about 25% from its $49.74 price.

Say Dolby only climbs to $61. The stock now trades above the $60 strike price, and the contract carries potential value. Traders refer to these contracts as in the money. However, you'd still be down $140.04 after subtracting that $100 of value from the $240.04 paid to open the trade.

Before submitting, you can choose the order's time in force. A good-for-day order cancels automatically if it doesn't fill before the market closes.

The review screen is your last chance to catch a mistake. Check the action, the strike, and the expiration one more time before you tap "submit." A wrong tap earlier in the process, like picking a put instead of a call, carries through unless you catch it here.

Once submitted, the order shows as pending until it matches with a seller. After it fills, the contract appears in your portfolio, and its value starts changing with the underlying price, time to expiration, and other pricing factors.

Once you own a contract, its value moves with the stock and, all else equal, its time value fades as expiration approaches. This leaves you with three main options.

Selling is the exit most buyers take, more common than exercising or riding a contract to expiration. The order mirrors the one that opened the trade, except the action now reads "sell to close." You can place it on any market day before the contract expires. The sale ends your side of the contract for good.

Take the Dolby $60 call, bought for $240.04. If Dolby climbs to $56, the bid might rise to $4.50. Selling at that price returns $450, a gain of about $210 before fees. If Dolby slips to $45 instead, the bid might sink to $0.80. Selling then returns $80 of the $240.04 paid, an early exit that limits the loss instead of losing it all.

Exercising means using the right you paid for. For the Dolby $60 call, it means buying 100 shares at $60 apiece, $6,000 in cash on top of the $240.04 premium already spent. A put works in reverse. Exercising it sells 100 shares at the strike price, which requires having shares on hand to deliver.

This means that exercising trades your option contract for stock or cash. To do it, simply tap "exercise" on the contract in your broker's app, and the trade settles the next business day. A call turns into shares landing in your account. A put turns into shares leaving your account, with cash landing in its place.

Do nothing, and the expiration date settles the trade for you. A call that finishes below its strike price is out of the money. It expires worthless, and you lose the premium you paid. Puts expire worthless when the stock finishes at or above the strike.

A call that finishes above the strike, even by a penny, carries value and doesn't just disappear. A put works in reverse, carrying value once the stock finishes even a penny below the strike. The Options Clearing Corporation (OCC) stands behind every listed options trade as its clearinghouse, and it automatically exercises any contract that closes a penny or more in the money.

For the Dolby $60 call, a close at $60.01 on expiration day can mean buying 100 shares for $6,000. To avoid exercise, you need to tell your broker not to exercise, and brokers set their own deadlines for that instruction.

You now know how a trade opens, prices, and closes. What trips up first-time traders usually isn't the mechanics. It's a handful of repeat mistakes:

Sending an order into a thin contract: Dolby's options chain showed a $0 bid against the $2.40 ask on that $60 call. Nobody was bidding on it at that moment, so you may not be able to easily sell your contract.

Treating a cheap, far-off strike as a bargain: Far-out strikes can look cheap, but a low premium isn't proof of a bargain. The contract still needs a larger move to finish in the money.

Watching only the stock price, not the calendar: A contract's value responds to several things at once, including the stock's price and the time left on the contract. A trader tracking only the price may be surprised to see the contract lose value, even after a move in the right direction.

Risking money saved for something else: Buyers can lose their entire premium. Trade only what you can watch disappear without impacting your finances.

Entering a trade without deciding how it ends: A contract closes by selling, exercising, or expiring. Decide which one fits your plan before you submit the order, so expiration day doesn't make that decision for you.

None of this means you should avoid options. Buying a stock simply asks you to get one thing right: up or down. Buying an option asks you to get three things right at once: direction, amount, and timing.

Not always, at least not right away. Selling a contract means taking on an obligation to deliver or buy shares, not just a choice, so riskier selling strategies often sit at higher approval levels. Covered calls and cash-secured puts are exceptions at some firms because shares or cash back up the obligation. Uncovered selling, where the trader doesn't have shares or cash to cover the calls and puts they sell, sits behind a tier most beginners don't start with.

No. Options trade on their own market, separate from the shares they track. If you buy calls or puts, you never need to hold a single share. Owning the stock only matters for certain selling strategies like covered calls. In those trades, the shares back up the seller's promise to deliver shares to the buyer.

No, options don't pay dividends. That payout belongs to the stock, not the contract sitting on top of it. If you're holding a call and want in on the dividend payouts, you'd have to exercise and actually own the shares before the dividend date.

Editorial disclaimer: Information on this page is for educational purposes and not investment advice or a recommendation to buy any specific asset or adopt any particular investment strategy. Independently research products and strategies before making any investment decision.

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