How do I buy options contracts?

Buying options contracts is an essential skill for any investor interested in exploring options trading. An options contract gives you the right (but not the obligation) to buy or sell an underlying asset at a predetermined price (called the strike price) before the option expires. In this guide, we will walk you through the process of purchasing options contracts, step by step.

1. Understand the Basics of Options Contracts

Before purchasing options, it’s important to understand what options are and how they work. An options contract is an agreement between a buyer and a seller that grants the buyer the right to buy or sell the underlying asset at a specified price before the contract expires. The two main types of options are:

• Call Options: A call option gives the buyer the right to buy the underlying asset at a specified strike price before the option expires.
• Put Options: A put option gives the buyer the right to sell the underlying asset at a specified strike price before the option expires.

2. Choose a Brokerage Platform

To buy options contracts, you first need to open a brokerage account with a platform that supports options trading. Most major brokerage firms offer options trading, but it’s important to choose a platform that suits your trading needs. Some of the top brokers for options trading include:

• TD Ameritrade
• Robinhood
• E*TRADE
• Interactive Brokers

Once you have selected a brokerage, you will need to complete their application process, which typically includes providing personal information, financial information, and agreeing to terms. Many brokers may require you to have a minimum balance or a certain level of experience to begin trading options.

3. Fund Your Account

Once your account is set up, the next step is to fund it. Most brokers offer several options to deposit funds, such as:

• Bank transfers
• Wire transfers
• Checks
• Transfer from another brokerage account

Ensure that your account is properly funded to cover the cost of the options premium (the price of the option contract) and any potential fees or commissions associated with the trade. Some brokers may offer commission-free trading, while others may charge a fee for options contracts.

4. Select the Type of Option

When buying an options contract, you’ll need to decide whether to purchase a **call** or **put** option. Here's how to decide:

• Call Option: Choose a call option if you believe the price of the underlying asset will rise. With a call option, you can profit by buying the asset at the strike price and selling it at a higher market price.
• Put Option: Choose a put option if you believe the price of the underlying asset will fall. With a put option, you can profit by selling the asset at the strike price when the market price is lower.

Choosing the right type of option will depend on your market outlook and trading strategy.

5. Choose the Expiration Date

Every options contract has an expiration date, which is the last day the option can be exercised. When buying an option, you’ll need to select an expiration date that aligns with your trading strategy. Options can have expiration dates ranging from a few days to several months in the future. Generally:

• Short-term options (weekly or monthly) have higher time decay and are suitable for quick, speculative trades.
• Long-term options (LEAPS) are used by investors who want to hold options for a longer period.

The expiration date will affect the option’s time value and premium, so it’s important to choose one that fits your market view and investment horizon.

6. Place the Order

After selecting the type of option and expiration date, you’ll need to place the order. Depending on your broker, this can typically be done online via their trading platform. You will have the option to:

• Place a market order (to buy at the current price).
• Place a limit order (to buy at a specific price).

When buying options, you’ll pay the premium, which is the cost of the option. This cost can vary based on factors such as the strike price, expiration date, and volatility of the underlying asset.

7. Monitor Your Position

After buying the options contract, it’s important to monitor the position. You can exercise the option, sell it before expiration, or let it expire worthless. You’ll need to decide based on how the underlying asset’s price moves and your original trade plan.

Options can be a flexible tool for speculating on price movements, but they also involve significant risk. Therefore, it’s important to carefully track the asset and make timely decisions to either exit the trade or hold until expiration.