Options Trading For Beginners - The Basics!
- FinancialWisdom
- May 19, 2023
- 4 min read
Updated: Jan 18
What is Options Trading - Explained simply for beginners.
Summary:
Options trading allows traders to speculate on price movements without owning the underlying asset, offering both powerful leverage and significant risk. In this beginner-friendly video, we break down what options really are, how call and put options work, why premiums exist, and how volatility, time, and price movement impact option values. You’ll learn the key differences between option buyers and sellers, how profits and losses are calculated, and why disciplined risk management is essential. If you’re new to options and want a clear, no-hype foundation before risking capital, this guide is for you.
Understanding Options: Power, Risk, and Responsible Use
Options trading is one of the most powerful tools in financial markets, but it is also one of the most misunderstood. While options can dramatically accelerate returns, they can just as easily destroy capital when used without proper understanding, structure, and risk control.
In this guide, we lay out a clear, beginner-friendly introduction to options trading. The goal is not to turn you into an options expert overnight, but to give you a solid foundation so you understand what options are, how they work, why they are risky, and how experienced traders approach them responsibly.
What Are Options?
An option is a financial contract between two parties that allows one party to buy or sell an asset at a predetermined price within a specified time period, without owning the asset itself.
Although options trade on exchanges like stocks, they are not ownership instruments. They are agreements that derive their value from an underlying asset such as a stock, index, commodity, or currency.
At the most basic level, options allow traders to speculate on price movement rather than invest in ownership.
A Simple Example: Call Options Explained
Let’s assume a trader believes Tesla’s share price will be higher in three months. We’ll call this trader the Tesla Bull.
Rather than buying Tesla shares outright, the Tesla Bull enters into an agreement with another trader, the Tesla Bear, who believes the price will not rise.
They agree on the following terms:
Strike price (exercise price): $165
Expiration: Three months
Premium: $10 per share
This contract gives the Tesla Bull the right, but not the obligation, to buy Tesla shares at $165 in three months.
Possible Outcomes
If Tesla trades at $190, the Bull can buy at $165 and immediately sell at $190, making $25 per share.
Since the Bull paid a $10 premium, the net profit is $15.
If Tesla trades below $165, the Bull simply lets the option expire and loses only the $10 premium.
This is a call option, used when a trader is bullish.
Selling Covered Calls is an options strategy that many use to create an income from premiums, this video provides a detailed understanding:
Why Would Anyone Sell Options?
At first glance, selling options seems like a bad deal. Why take the risk?
This is where the option premium matters.
The seller receives the premium upfront and keeps it regardless of outcome. The premium compensates the seller for taking on risk.
The buyer has limited downside (premium paid) and potentially large upside.
The seller has limited upside (premium received) and potentially large downside.
This imbalance is why risk management is critical, especially for option sellers.
Put Options: Profiting From Falling Prices
Put options work in the opposite direction.
A put option gives the buyer the right to sell an asset at a fixed price.
For example:
Strike price: $165
If the stock falls to $140, the buyer can still sell at $165
The seller absorbs the loss, offset by the premium received
Put options are used by bearish traders or investors hedging downside risk.
What Determines an Option’s Price?
Option premiums are influenced by three main factors:
1. Intrinsic Value (Moneyness)
How far in-the-money the option is relative to the strike price.
2. Time Value
The longer the time until expiration, the higher the premium, because more time means more uncertainty.
3. Implied Volatility
The expected volatility of the underlying asset. Higher volatility increases premiums dramatically.
These variables make options dynamic instruments whose prices can change rapidly, even if the underlying asset barely moves.
Why Options Are So Risky
Options are leveraged instruments.
A 20% move in a stock can result in a 150% gain, or a near-total loss, in an option premium.
This leverage works both ways:
Gains are magnified
Losses are accelerated
Many options expire worthless, meaning the buyer loses 100% of the premium. This is not rare, it’s normal.
How Professionals Trade Options
Successful options trading is not about prediction, it’s about process.
Professional traders:
Track a small number of underlying assets closely
Use structured entry and exit rules
Trade options only when their core strategy signals a setup
Accept that many trades will lose
Keep position size small
Options should always be traded in alignment with the underlying price action, not independently.
Many members use options to trade stocks we identify using our bespoke stock scanner, finding stocks breaking out of consolidation.
Risk Management: The Non-Negotiable Rule
Because option premiums can go to zero, risk control is everything.
Professional options traders rarely risk more than:
1–2% of total capital per trade
Large positions, emotional trading, or revenge trading with options can end a trading career very quickly.
If you are new:
Start small
Expect losses
Focus on learning, not profits
Treat options as a skill, not a shortcut
Final Thoughts
Options trading is neither gambling nor a guaranteed path to wealth. It is a tool—one that amplifies both skill and mistakes.
Used correctly, options can complement a solid trading strategy. Used carelessly, they can destroy capital faster than almost any other instrument.
Start slow. Respect the risk. Build a system. And most importantly, survive long enough to learn.
Related Reading
Inside the Financial Wisdom Weekly Consolidation Breakout Framework
Risk Management in Trading: The Foundation of Long-Term Profitability
Published by FinancialWisdomTV.com Trading Education | Risk Management | Trading Psychology
Thanks Gareth, for the work on this. I am not even going to dive into these sort of complex instruments as they are more likely to turn bad than the effort worth. Good for information only certainly. Appreciate the info regardless :)
@FinancialWisdom : Gareth, can you please focus on reviewing Trading books & systems again, or have we run out of them? One new segment that you can consider reviewing is other trading Youtubers, like Ranyer Teo, who claim to have trading systems that are always profitable, and cost $3000 to sign up for. No one else is reviewing their systems and proving them as legit or not.