How to Trade Options

How to Buy Lyft Stock

Trading stock options is easier than you might think, and it’s one of the best ways to turn a small amount of money into a large amount of money without taking on too much risk.

A mere $1,000 purchase of Netflix stock options in January of this year would be worth well over $25,000 today. There aren’t many stocks besides marijuana stocks that yield a 2,500% return in 2 months.

Buying stock options always has favorable risk-reward, because your potential gains are unlimited and your potential losses are always strictly limited. Here’s the inside scoop on how you can trade stock options today.

1 Minute Summary

  • Step 1: Open a brokerage account with a low-cost options trading broker
  • Ally Invest is the best online broker to trade stock options and offers discounted pricing for active options traders
  • Take 3 minutes to understand key options trading terms after you open your account
  • Decide if you’re bullish or bearish (betting that a stock will go up or down)
  • Buying call options = bullish, buying put options = bearish
  • Place an options trade that reflects your investment outlook
START TRADINGopen an account on Ally Invest’s secure Site

Why Trade Stock Options?

Stock options offer insane leverage. With stock options, it’s totally possible to turn $1,000 into $100,000.

The most important thing to know about options is that 1 stock option equals 100 shares of stock. It’s that simple. If you buy 10 options, you’re theoretically trading 1,000 shares.

This is called leverage. Traders like options for this exact reason. When you buy an option contract, the most you can lose is the amount you paid for the contract, and the most you can make is pretty much unlimited.

Step #1: Opening an Account

The first step to trading options is to open an online brokerage account, which takes about 5 minutes.

Ally Invest is the best online options broker for 2019.

Options contracts start at just $3.95 + $0.50 per contract at Ally, which is significantly cheaper than the industry standard of $6.95 + $0.85. If you use Ally, you’ll save on every trade and get free access to online options trading tools and platforms to help you place trades.

Of course, there are never any maintenance or inactivity fees with Ally. It’s completely free to have an account. Simply put, Ally Invest is the best online broker for trading options in 2018.

Step #2: Doing the Research

Once your account is opened (takes 5 mins), the next step is to navigate to the “Trade” tab on Ally’s online trading platform.

For this example, I’m going to use Starbucks (ticker symbol: SBUX). Starbucks is the most popular retail coffee shop franchise in the world, and a lot of customers and veteran investment bankers see serious value in the company.

When you sign into your Ally Invest account, the page will look like this:

Enter the name of the stock you want to buy in the box on the left.

Step #3: Making the Trades

Once you’ve entered the company name into Ally’s platform, real-time prices and buttons to buy and sell the stock will appear.

Once you’ve selected a stock to invest in, the next decision to make is how many shares to purchase. The exact number of shares to purchase is entirely up to you. You can buy 1 share or 1,000,000 shares. You’re only limited by the funds you have available. Ally’s system, thankfully, won’t let you accidentally purchase too many shares relative to your account value. As a general rule of thumb, most investors never put more than 10% of their available funds into a single stock. So if you have $1,000 and a stock is $50 per share, you might want to only buy a few shares.

When it comes to placing orders, we always prefer to use limit orders, because you get to decide what price you want to buy or sell at. A market order will execute your order at the current market price. This is sort of like buying a house without looking at the offering price; for stocks, market orders are only useful if you don’t care about the short-term price movements and just want to own the stock. After submitting your order, you’ll receive a confirmation of your investment and you’ll officially be an investor!

If you want to sell your investment and close out your position, all you have to do is click on your position in your Ally Invest account and click “sell”. Of course, if you need help with anything in this process, customer service is ready to help you 24/7.

What are Stock Options?

There are two types of stock options, call options and put options.

call option gives the buyer the right, but not the obligation, to buy 100 shares of stock at a predetermined price, the strike price, on a predetermined date, the expiration date.

put option gives the buyer the right, but not the obligation, to sell 100 shares of stock at a predetermined price, the strike price, on a predetermined date, the expiration date.

Options are merely a contract between two parties in the market. However, options are not suitable for all investors. Since one options contract represents 100 shares of stock, options present a high degree of leverage. However, this means there’s more upside leverage. Just 10 options contracts equate to 1000 shares of stock, and it’s often a fraction of the cost to buy 10 options contracts than 1,000 shares.

Key Options Terms

Knowing a few key options terms will help you understand how to trade. Click on each term to open a detailed description of that term in a new tab.

Strike price = specific price that an options contract is eligible to be exercised

In the money = A call option is considered to be in the money if its strike price is below the current price of the underlying asset. A put option is considered to be in the money if its strike price is above the current price of the underlying asset

Out of the money = A call option is considered out of the money when its strike price is higher than the current price of the underlying security. A put option is considered out of the money when its strike price is lower than the current price of the underlying security

At the money = A call or put option is considered to be at the money when its strike price is equal to the price of the underlying asset

Volatility = the amount of risk or uncertainty a stock or options contract has based on changes in the stock or options contract’s price

Expiration = the predetermined date when the the options contract will expire and no longer be tradable

Are you Bullish or Bearish or Neutral?

The next step to trading stock options is knowing if you’re bullish or bearish or neutral.

If you’re bullish, you expect the stock price to rise.

If you’re bearish, you expect the stock price to fall.

If you’re neutral, you expect the stock to stay in a tight range and move up or down minimally.

It’s as simple as that. If you expect the price of a stock to rise, you would trade a bullish options trading strategy. Conversely, if you expect the price of a stock to fall, you would trade a bearish options trading strategy. Following this logic, if you expect the price of a stock to stay relatively the same, you would trade a neutral options trading strategy.

The number one reason why options trading is popular, besides the increased leverage, is because options allow investors to speculate that stocks might not move at all. Essentially, options make it possible to make money even when the stock market doesn’t move up or down.

Final Thoughts

In the world of finance, investing is always considered somewhat risky, but it’s also highly lucrative. As the old saying goes, “fortunes favor the bold.”

At the end of the day, buying stocks and investing is planning for your financial future. Regardless of the amount of cash you have in your bank account, if it’s just sitting there, it’s not doing anything for you. Savvy investors don’t work for money, they make money work for them, and investing in stocks is one of the only ways to do that.

What You’ll Need to Open a Brokerage Account

Opening an Account

It takes about 5 minutes to open an account with Ally Invest. There is no fee to open or maintain.

Verifying Yourself

You’ll probably have to answer questions about your current income and employment status.

What You’ll Need

US licensed stock brokers are required to have each client’s Social Security Number for tax purposes.


  • As low as $3.95 + $0.50 per options contract
  • No inactivity or hidden fees with any Ally Invest or bank accounts
  • 24/7 investing support
  • Millions of satisfied clients
START TRADINGopen an account on Ally Invest’s secure Site

What is Options Bro? is an online financial information site dedicated to providing simple tutorials, reviews, and comparisons on all things finance.

Collectively, we’ve spent thousands of hours examining the most popular financial products and tools. Bottom line, we simplify and explain the myriad of consumer financial options available today, so you can make decisions with ease.

Updated: February 18, 2019