How to Trade Options: Seven Steps From Approval to a First Contract

Placing an options trade can resemble buying a stock: choose a ticker, enter a quantity, and submit an order. The difference is that an options ticket adds several decisions before the trade is sent, and each one changes the contract terms. The spread of zero-commission, app-based brokerage platforms has widened access to options for individual investors in recent years, making the mechanics behind those decisions worth understanding before committing capital.

Those choices define whether the trade is based on a stock price rising or falling, how far the move would need to go, and how much time the move has to happen. The process starts with account approval and continues through contract selection, order entry, and expiration.

How options work

An option is a contract that gives its holder the right to lock in a price to buy or sell a stock for a limited period. A call locks in a purchase price. A put locks in a sale price.

The locked-in price is called the strike price. The upfront cost of the contract is the premium. Each contract also has an expiration date, after which it no longer exists and can no longer be exercised to buy or sell at the strike price.

Standard options on stocks and exchange-traded funds (ETFs) cover 100 shares per contract. Premiums are quoted per share, so a $2 quote represents $200 for one contract. If the underlying price moves far enough in the buyer's favor before expiration, the contract can have value. If it does not, the buyer can let the contract expire and lose only the premium paid.

Options markets involve buyers and sellers. The buyer pays the premium and receives the right to exercise the contract at the strike price or allow it to expire. The seller collects the premium and accepts the opposite obligation: to buy shares from the buyer or sell shares to the buyer at the locked-in price if the buyer chooses to exercise.

Seven steps to place a first options trade

Most brokers use a similar sequence for options orders, even if their screens differ. The process generally begins with approval, then moves through the underlying asset, options chain, contract type, strike, expiration, cost, and final order review.

1. Apply for options trading approval

A standard brokerage account does not automatically include options access. Investors must apply for permission to trade options. The application typically asks about trading experience, income, net worth, and intended use of options.

The approval requirement reflects regulatory expectations that brokers evaluate whether options are suitable for each customer before granting access.

The broker uses those answers to decide whether options are appropriate for the account. Approval times differ by firm. Schwab, for example, says it emails applicants a decision within three business days, while Robinhood approved the source writer's account almost instantly.

If approved, the account receives an options approval level that determines which trades it can place. Brokers commonly use around five tiers from lower to higher risk, although the number varies by firm. Lower levels typically allow buying calls and puts. Higher levels may allow more complex and potentially riskier strategies, including selling contracts on stock the trader does not own.

2. Choose a stock or ETF

Every option is tied to an underlying asset, such as a stock or ETF. A trader does not need to own that asset to buy calls or puts on it. ETF options work the same way as stock options, except the contract tracks the fund's price rather than a single company's shares.

Owning shares mainly requires a view on whether a company or fund may improve over time. Options require a more precise view because the contract depends on price direction, the size of the move, and timing. A general belief that a stock may rise eventually may not fit inside an options contract's deadline.

Heavily traded stocks and ETFs generally have more active options markets. Greater activity can support fairer pricing and make it easier to sell a contract before expiration.

In the source example, the selected stock was Dolby (DLB), a well-known audio equipment company. Dolby shares were trading near $50 when checked after a year-long downtrend. Once options approval was added to the account, a "Trade DLB options" button appeared below the stock's price window.

3. Read the options chain

An options chain is a table showing available options contracts for a particular stock in one view. On many platforms, expiration dates appear across the top, while strike prices run down the middle, with calls on one side and puts on the other.

Using a simplified view, the source priced a Dolby call while the stock traded at $49.74 on July 21, 2026. A $60 call expiring in 31 days had a premium of $2.40 per share, for an estimated total cost of $240.04 after regulatory and exchange fees. Buying that contract gives the right to buy 100 Dolby shares at $60 each, regardless of how high the stock trades before the contract expires.

If Dolby trades at $70 before expiration, the holder can buy shares at $60 and may profit from the difference. If the holder keeps the contract through expiration and Dolby never rises above $60, the contract expires worthless and the premium is lost.

4. Choose a call or a put

The choice between a call and a put converts a price view into a contract. A call gives the buyer the right to buy 100 shares at a set strike price. Calls can have value when the stock rises above that strike price.

A put gives the buyer the right to sell 100 shares at the strike price. Puts can have value when the stock falls. They can also be used to protect shares already owned, functioning like insurance by locking in a floor price in exchange for a fee.

5. Choose a strike price and expiration date

Two choices strongly shape the price of an option: the distance between the strike price and the stock price, and the time remaining until expiration.

Dolby's options chain illustrates the relationship. For the 31-day expiration, strikes closer to the stock's price cost more because they require a smaller move to have value.

When a call strike is below the stock's current price, as with Dolby's $45 call, the premium is higher because the contract already has value even if the stock does not move further.

Expiration follows a similar logic. A longer window typically costs more because the stock has more time to reach the strike. Once the contract is purchased, that same passage of time works against the buyer. All else equal, an option's value declines as time passes, and the effect often accelerates as expiration nears. Traders call this time decay.

Beyond distance and time, implied volatility—the market's expectation of how much the underlying stock may move—also influences a contract's premium. When traders anticipate larger price swings, premiums tend to rise across most strikes and expirations. When expectations calm, premiums tend to fall even if the stock price has not moved. Implied volatility can shift independently of the stock price, meaning a contract can lose value even when the underlying moves in the expected direction if volatility expectations decline.

6. Calculate the full cost

To calculate an option's cost, multiply the quoted ask or bid price by the 100 shares covered by each contract. Brokers may also add per-contract fees. Schwab and Fidelity charge $0.65 per contract, while Robinhood does not charge a commission but passes through a $0.04 regulatory fee per contract.

Dolby's $60 call had an ask price of $2.40 per share. Multiplying $2.40 by 100 shares, then adding regulatory and exchange fees, produces the total cost. Two contracts would cost about $480.08.

The $240.04 premium raises the level at which the trade becomes profitable. The $60 strike is where the contract begins to carry potential value, but the $2.40 per share premium must be recovered first. Adding the $60 strike and the $2.40 premium means Dolby would need to rise above $62.40 for the trade to turn a profit, about a 25% move from $49.74.

If Dolby climbs only to $61, the stock is above the $60 strike and the contract has value. Traders call such contracts "in the money." Even so, the holder would still be down $140.04 after subtracting the $100 of contract value from the $240.04 paid to open the trade.

7. Submit the order

Before submitting an options order, the trader can choose its time in force. A good-for-day order cancels automatically if it does not fill before the market closes.

The review screen is the final opportunity to find mistakes. The action, strike, and expiration should be checked before tapping "submit." An earlier error, such as choosing a put instead of a call, remains in the order unless it is caught at this stage.

After submission, the order appears as pending until it matches with a seller. Once filled, the contract appears in the portfolio. Its value then changes with the underlying stock price, time to expiration, and other pricing factors. Many brokers also offer paper trading—simulated practice accounts with no real money at stake—so first-time traders can rehearse the order flow before committing capital.

What can happen after buying an option contract

After a trader owns a contract, its value moves with the underlying stock. All else equal, its time value declines as expiration approaches. Changes in implied volatility can also push the contract's value higher or lower independently of the stock price and the calendar. The holder generally has three choices: sell the contract, exercise it, or let it expire.

1. Sell the contract

Selling is the exit most options buyers use, and it is more common than exercising or holding through expiration. The order is similar to the opening trade, except the action becomes "sell to close." It can be placed on any market day before the contract expires. Once completed, the sale ends the holder's side of the contract.

For example, consider the Dolby $60 call purchased for $240.04. If Dolby rises to $56, the bid might rise to $4.50. Selling at that price returns $450, a gain of about $210 before fees. If Dolby falls to $45 instead, the bid might drop to $0.80. Selling then returns $80 of the original $240.04, limiting the loss compared with holding until a potential expiration at zero.

2. Exercise the contract

Exercising means using the right purchased through the option. For the Dolby $60 call, exercising would mean buying 100 shares at $60 each, requiring $6,000 in cash in addition to the $240.04 premium already paid.

A put works in reverse. Exercising a put sells 100 shares at the strike price, which requires having shares available to deliver.

Exercise converts the option contract into stock or cash. In a broker's app, the holder may select "exercise" on the contract, with the trade settling the next business day. A call results in shares being added to the account. A put results in shares leaving the account and cash taking their place.

3. Let the contract expire

If the holder does nothing, the expiration date settles the trade. A call that finishes below its strike price is out of the money and expires worthless, causing the buyer to lose the premium paid. Puts expire worthless when the stock finishes at or above the strike price.

A call that finishes above the strike, even by one cent, has value and does not simply disappear. A put has value when the stock finishes even one cent below the strike. The Options Clearing Corporation (OCC), the clearinghouse for every listed options trade, automatically exercises any contract that closes one cent or more in the money.

For the Dolby $60 call, a close at $60.01 on expiration day could mean buying 100 shares for $6,000. To avoid exercise, the holder must instruct the broker not to exercise, and each broker sets its own deadline for that instruction.

Five common mistakes among first-time options traders

The mechanics of an options trade are only part of the process. First-time traders often run into several recurring issues.

One mistake is sending an order into a thinly traded contract. Dolby's options chain showed a $0 bid against the $2.40 ask on the $60 call. With no one bidding at that moment, it may be difficult to sell the contract easily.

Another is treating a cheap, distant strike as a bargain. Far-out strikes can appear inexpensive, but a low premium does not prove the contract is attractively priced. The contract still needs a larger move to finish in the money.

A third mistake is watching only the stock price and ignoring the calendar. An option's value responds to several factors at once, including the underlying stock price and the time remaining. A trader watching only the stock may be surprised if the contract loses value even after the stock moves in the expected direction.

Another risk is using money set aside for other financial needs. Options buyers can lose the entire premium.

A final mistake is entering a trade without deciding how it should end. A contract can close by being sold, exercised, or allowed to expire. That decision should be considered before the order is submitted so expiration day does not make the decision by default.

Buying a stock requires being right about direction: up or down. Buying an option requires being right about direction, size of the move, and timing.

Options trading FAQs

Can a beginner sell options instead of buying them?

Not always, and often not immediately. Selling a contract creates an obligation to deliver or buy shares, rather than only a choice, so riskier selling strategies are often placed at higher approval levels. Covered calls and cash-secured puts are exceptions at some firms because shares or cash back the obligation. Uncovered selling, where the trader does not have shares or cash to cover the calls and puts being sold, is usually behind a tier most beginners do not start with.

Do you need to own a stock before trading options on it?

No. Options trade in their own market, separate from the shares they track. A trader buying calls or puts does not need to hold any shares. Owning the stock matters for some selling strategies, such as covered calls, where the shares support the seller's promise to deliver shares to the buyer.

Do options pay dividends like stocks?

No. Options do not pay dividends. Dividends belong to the stock, not to the contract tied to it. A call holder who wants to receive dividend payments would need to exercise and own the shares before the dividend date.

Editorial disclaimer: This information is for educational purposes and is not investment advice or a recommendation to buy any specific asset or use any particular investment strategy. Investors should independently research products and strategies before making investment decisions.