How to Buy & Sell Options
How Options Work
Key Takeaways
- Choose your strategy, strike price, and expiration before entering any trade.
- Use limit orders (never market orders) for options trades.
- Learn to read an options chain: it shows all available strikes, expirations, and premiums.
TL;DR
Buying or selling options follows a clear process: pick a strategy, select a strike and expiration, then place an order through your broker's options chain. Always use limit orders and start with liquid stocks that have tight bid-ask spreads.
The Four-Step Process
Every options trade follows the same sequence:
Step 1: Choose your strategy: Are you buying or selling? Calls or puts? Covered call, cash-secured put, or something else?
Step 2: Select the strike price: This determines your risk and reward. Further OTM = less premium, higher probability of profit for sellers.
Step 3: Choose the expiration: 30-45 DTE is the sweet spot for sellers. Buyers may want longer durations.
Step 4: Place the order: Always use limit orders. Set your price and wait for a fill.
Reading an Options Chain
The options chain is a table your broker shows with all available contracts for a stock. Here's what each column means:
Strike: The price at which the option can be exercised
Bid: The price buyers are willing to pay (what you get when selling)
Ask: The price sellers want (what you pay when buying)
Volume: Number of contracts traded today
Open Interest: Total contracts currently open
IV: Implied volatility for that strike
Delta: How much the price moves per $1 stock move
Calls are typically on the left, puts on the right, with strikes in the center column.
Order Types
Buy to Open: Opening a new long position (buying calls or puts).
Sell to Open: Opening a new short position (selling calls or puts). This is what you do for covered calls and CSPs.
Buy to Close: Closing a short position you previously sold. Use this to take profits early or cut losses.
Sell to Close: Closing a long position you previously bought.
Limit Order: Only execute at your price or better. Always use these for options.
Market Order: Execute immediately at whatever price is available. Avoid for options. Spreads can be wide.
Always Use Limit Orders
Market orders on options can cost you dearly. If the bid is $2.00 and the ask is $2.50, a market buy fills at $2.50, so you immediately lose $0.50/share ($50/contract). A limit order at $2.25 (the mid-point) often gets filled and saves you real money.
Start at the mid-point between bid and ask. If it doesn't fill in a few minutes, adjust toward the natural side (closer to the ask for buying, closer to the bid for selling).
Start With Liquid Stocks
Liquidity matters more in options than stocks. Liquid options have:
- Tight bid-ask spreads (< $0.05 for near-the-money strikes)
- High open interest (1,000+)
- High volume
Best beginner stocks for options: SPY, QQQ, AAPL, MSFT, NVDA, AMD, TSLA, AMZN, META, GOOGL. These have the tightest spreads and most available strikes.
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