How to open an options trading account
The process for how to open an options trading account is similar to opening a brokerage account. Here's how:
- Choose which options trading platform you want to use.
- Apply for an account online. You can apply for some options trading platforms with some of the links on this page.
- Provide necessary identification, such as your Social Security number and driver's license.
- Sign any additional required forms for trading options.
- Get approval from the broker to trade options -- brokerages will ask you questions about your income, net worth, and investing experience. You might not be approved immediately to trade options at the level that you want; you might be limited to a lower amount of money that you can use for options trading.
- Fund your options trading account. This can be done via electronic funds transfer (EFT) from your bank account, by check, or by wire transfer.
Many options trading accounts can be opened online in just a few minutes. But it might take a few days to get your account funded via bank transfer so you can actually start trading options and making investments.
How to get started trading options
After your options trading platform account is approved, open, and funded, here's how to start trading options:
- Decide what options you want to trade. Options are contracts based on the future price of stocks, and the most common types of options are "call" and "put" options. When you buy a call option, you are expressing the belief that the price of a stock will go up, while buying a put option means that you believe the price of a stock will go down.
- Do research and analysis. Trading options is not simple and it's not for everyone; it's an advanced trading strategy that's often used by more sophisticated investors to manage risk or capture additional upside that might not be possible just from buying and selling stocks. The best options trading platforms offer research tools and statistical analysis so you can make better-informed decisions about which options to buy and sell -- and when to make trades.
- Review the list of available options trades on your brokerage. Your options trading platform will offer a list of options trading ideas for various stocks -- this list of possible trades is called an "option chain." Different stocks will have different options contracts with a variety of expiration dates and strike prices (the predetermined price that options traders agree to buy or sell the stock).
- Choose a "strike price" for your options. Buying options gives you the right (but not the obligation) to buy or sell a stock in the future at a predetermined price, called the "strike price." For example, if the stock of company XYZ is currently trading at $50 per share, but you believe the company is likely to become more successful in the next few months, you can buy a call option at a strike price of $75 per share and an expiration date in six months, at a premium of $5 per share. Options contracts include 100 shares, so you would pay a $500 premium for the future rights to buy 100 shares. This gives you the option to buy that stock at a higher price -- if company XYZ's share price goes up, you can make more money with a successful call option than you would've made just by purchasing shares.
- Make your options trade. Once you choose which option you want to trade, you can go into your options trading platform account and buy (or sell) the options contract of your choice. A trade ticket will be opened within your account, and you can then pay the premium and any other commissions or trading fees.
Our pick for the best beginner options trading platform is SoFi Active Investing. SoFi doesn't charge a contract fee, which makes it budget-friendly for the active trader, and the platform has a lot of educational materials for beginners to learn from.
What can you trade options on?
Options are contracts that let investors speculate on the future price of something, typically stocks. In its simplest form, an options contract lets -- but never requires -- the options buyer to purchase or sell stocks at a predetermined price by a set date. If the buyer decides to exercise their contract, the seller must follow through.
Options can be broken down into two basic types.
Call options
Call options let options buyers buy stock at a predetermined price (the "strike price"). When investors buy call options, they're often speculating that a stock's price will rise before the options contract expires. If they're right, they can buy their shares of the stock at the lower strike price.
Put options
Put options let options buyers sell stock at an agreed-upon strike price. When investors buy put options, they're often speculating that a stock's price will fall before the options contract expires. If they're right, they can sell their shares of the stock at the higher strike price.
Examples of call and put options
To understand these basic types, let's look at two examples.
Let's assume Stock AB has a share value of $50. You have good reason to believe Stock AB will appreciate by 20% over six months and will at that time be worth $60 a share. To act on that belief, you could buy 100 shares of Stock AB for $5,000. Or, if you didn't want to wager $5,000, you could buy call options of $50 for $2 a pop (or $200 total for 100 shares).
If you're right and the stock appreciates to $60 within six months, you would earn $10 on each option, for a total of $1,000. Minus the $200 you paid for your options, you'd be left with a profit of $800. Not bad for an initial investment of $200.
Now, let's assume another investor believes Stock AB will depreciate over six months. In this case, they could buy a put options contract with a strike price of $60 for $2 a share and 100 shares total (or $200). If they're right and the stock falls to $36, they would make $24 a share for a total of $2,200 in profit ($2,400 minus the $200 for the put contract).
How much money do you need to start trading options?
Many options brokers have minimum deposit requirements for options trading. If you're interested in level one option trading, which usually includes covered calls and secured puts, the minimum requirement may be less than $1,000. But certain options strategies, such as net credit spreads, may require a much higher minimum account balance -- sometimes as high as $10,000 or more.
Options trading is subject to the "pattern day trading" rule, which classifies any investor who makes four or more day trades within five business days as a day trader. If you're classified in this way, you must keep a minimum equity balance of $25,000 in your account on any day that you're trading (check with your online broker as they may have different requirements). In options trading, a day trade is defined as closing a contract on the same day you open it.
But as long as you meet the minimum balance requirements for your options trading platform account, the good news is that trading options doesn't cost much money. Many of the best options trading brokers have commission-free options trading, but may charge options trading fees per contract (some charge $0.65 per contract). Robinhood and Webull are the few free options trading platforms that have 100% free options trading -- both have a $0 commission and no per-contract fees for online trades.
What are the risks of options trading?
Options trading can be risky -- even riskier than just buying and selling stocks. All options trading is leveraged investing, which inherently carries greater risk. You could face unlimited losses with certain options trading strategies, such as selling naked calls.
Buying call or put options typically isn't as risky as the most extreme scenarios of options trading, because the most you can lose is the amount you spent to buy the options contract. A typical risk that an options trader might face would be having their options expire without ever reaching the target strike price, thus becoming worthless. For example, if an investor buys a call option contract for $5 per share that expires without paying off -- this options trader would lose $500 for the money spent on the options premium, but would not be risking any additional losses.
Risks with selling options
Selling call and put options is much riskier than buying them -- because in this case, the options trader can be exposed to bigger losses than just a one-time premium cost. If you sell an option and the stock price goes past the strike price, you could be on the hook to pay whatever price is required to fulfill the option contract.
Risks with buying options
Buying options, instead of selling options, is often a safer way to be an options trader, especially for beginners who want to learn more about the stock market. But all options traders need to be savvy and have a well-informed point of view about "why" they're trading options in a particular stock -- ask yourself:
- Do you believe the company's stock is undervalued, or overpriced?
- Why do you think the situation will change, and how soon?
- Can you stomach the risks of being wrong?
Options strategies to reduce risk
Options trading is a flexible way to invest, because it lets investors exercise bullish, bearish, or neutral strategies. Trading options can also be used as a way to hedge your risks. If you are buying a large stock position, with the theory that the stock price is likely to go up, you can also buy put options for that same stock to help protect yourself from downside risk in case the stock price declines.
But no matter what options trading strategy you use, make sure you do careful research and understand the trades you make. Even the best informed, most experienced options traders can still make mistakes and experience bad luck in the markets, but understanding how options work can help reduce your chance of loss.
An options trading platform is an online brokerage that offers the ability to trade options as part of its investment offerings. Not every online brokerage offers options trading. But some of the best stock trading apps also offer options trading.
You need an options trading broker to access the market, so you cannot trade options without one. Many of the best options trading apps and platforms allow you to practice options trading, including E*TRADE and TradeStation.
Fact Checked
Nathan Alderman
2024 Award Winner
