What Are Options? Complete Beginner's Guide to Options Trading Strategies
What Are Options? Complete Beginner’s Guide to Options Trading Strategies
A tour of the options casino (and the one table where the house doesn’t always win)
“So I took my ass to Vegas last month - literally! My donkey A$$et wanted to see how actual casinos compared to the options market. After watching people lose their shirts at the roulette table for a few hours, he turned to me and said, ‘At least here the odds are clearly posted and nobody pretends this is an investment strategy.’”
But A$$et being the smart ass that he is — he thinks being the house is a pretty good gig.
Options 101 — The Wall Street Casino
Welcome to the options market - Wall Street’s answer to Las Vegas, except with better suits and worse odds.
Table of Contents
- What Are Stock Options? (Basic Definition)
- Call Options vs Put Options Explained
- How Do Options Work for Beginners?
- Options Trading Strategies: Complete List
- Why Most Options Strategies Are Speculation
- Covered Calls: The Only Non-Gambling Strategy
Before we dive in, let me introduce your guide through this financial funhouse.
Meet A$$et, our mascot and resident smart ass. He’s here to keep things honest, call out the BS, and occasionally complain when people try to use him as furniture for their lazy investment strategies.
Welcome to the options casino! I’m here to show you around, but fair warning - most of these games are rigged against you. Stick with me and I’ll show you the one table where you can actually win consistently.
What Are Stock Options? (Basic Definition)
Let’s get the basics out of the way faster than a Vegas dealer shuffles cards.
An option is a contract that gives someone the right (but not obligation) to buy or sell a stock at a specific price by a specific date. That’s it. No PhD required.
One option contract controls 100 shares of stock, and options are quoted on a per-share basis. (i.e. a $1 option costs $100)
Key Components of Every Option:
- Underlying stock: The stock the option is based on
- Strike price: The price at which you can buy/sell the stock
- Expiration date: When the option expires (usually monthly)
- Premium: The cost to buy the option
Think of options like concert tickets. You pay upfront for the right to attend the show (exercise the option), but you don’t have to go if something better comes up. The difference is concert tickets don’t expire worthless 75% of the time.
Call Options vs Put Options Explained
There are only two types of options, and understanding the difference is crucial:
Call Options
- Definition: The right to BUY a stock at a set price
- When to use: When you think a stock will go UP
- Maximum loss: Premium paid (for buyers)
- Example: Buy a call option to purchase Apple at $180 when it’s trading at $175 because you think it will go to $200
Put Options
- Definition: The right to SELL a stock at a set price
- When to use: When you think a stock will go DOWN
- Maximum loss: Premium paid (for buyers)
- Example: Buy a put option to sell Apple at $170 when it’s trading at $175 because you think it will go to $150
The Key Insight: Whether you’re buying calls or puts, you’re essentially betting on direction and timing. Get either wrong, and you lose everything you paid.
How Do Options Work for Beginners?
Two sides to every options trade:
Option Buyers (The Gamblers)
- Pay premium upfront for the right to do something
- Hope for big stock moves in their favor
- Lose everything if wrong (premium goes to zero)
- Success rate: ~25% (most options expire worthless)
Option Sellers (The House)
- Collect premium upfront and promise to deliver if called upon
- Profit from small moves or no moves in the stock
- Keep the premium most of the time (when options expire worthless)
- Success rate: ~75% (collect premium when options expire worthless)
Buyers hope for lightning to strike. Sellers collect rent while waiting for the storm to pass. Guess which approach pays the bills?
Options Trading Strategies: Complete List
Picture the options market as a giant casino with different tables offering different ways to bet your money. Let me walk you through each one:
Long Calls (The Lottery Ticket Booth)
The Bet: “This stock is going to the moon!”
How it works: Buy call options hoping for massive price moves
Win Rate: ~25% (most expire worthless)
Risk Level: 🎰🎰🎰🎰 (Total loss of premium, but limited to premium)
Typical Player: Day traders who watch too much YouTube
Long Puts (The Apocalypse Betting Window)
The Bet: “Everything is going to crash!”
How it works: Buy put options hoping for dramatic price drops
Win Rate: ~25% (most expire worthless)
Risk Level: 🎰🎰🎰🎰 (Total loss of premium, but limited to premium)
Typical Player: Perma-bears who’ve been predicting crashes since 2010
Naked Calls (The Financial Suicide Booth)
The Bet: “This stock definitely won’t go up”
How it works: Sell call options without owning the stock
Win Rate: ~75% (collect premium most of the time)
Risk Level: 💀💀💀💀💀 (Infinite loss potential)
Typical Player: People who hate their families
This is like playing Russian roulette with your entire financial future. Don’t. Just don’t.
Complex Spreads (The PhD Pretension Parlor)
The Bet: “I’m smarter than everyone else here”
How it works: Iron condors, butterflies, and other strategies with cool names
Win Rate: Varies (usually worse than simple strategies)
Risk Level: 🎰🎰🎰 (Limited but still substantial)
Typical Player: Finance bros who want to sound impressive at parties
Covered Calls (The Income Generation Station)
The Bet: “I’ll collect rent on stocks I already own”
How it works: Own the stock and sell someone the right to buy it
Win Rate: ~75% (collect premium most of the time)
Risk Level: 🛡️ (Main risk is limiting upside, but generally same risk as owning the stock, plus income)
Typical Player: Smart people who like getting paid monthly
Finally! A table where you’re not betting against the house. You ARE the house. This is the table where you’ll find the smart asses like me!
Why Most Options Strategies Are Speculation
Here’s what separates covered calls from everything else:
Most Options Strategies: You’re betting on what the market will do
Covered Calls: You’re getting paid for what the market probably won’t do
Most Options Strategies: You can lose 100% of your investment
Covered Calls: Your maximum loss is the same as owning the stock (but with income cushion)
Most Options Strategies: You need to be right about direction and timing
Covered Calls: You make money if the stock goes up, stays flat, or goes down
Most Options Strategies: Time decay works against you
Covered Calls: Time decay works for you
Covered Calls: The Only Non-Gambling Strategy
The Numbers Don’t Lie (Late 2024 Reality)
Let’s get specific with some real-world data:
Long Call Options (SPY):
- Average success rate: 25%
- Average loss when wrong: 100%
- Monthly cost: $500-2,000 per contract
Covered Calls (SPY):
- Success rate (collect premium): 75%
- Monthly income: $400-800 per contract
- Downside protection: Premium collected
Let’s see… 75% chance of collecting money vs. 25% chance of making money. I may be an ass, but I’m not stupid enough to take the 25% side of that bet.
”But, But, But, What About…”
“But what about huge gains from call options?”
Sure, and what about huge jackpots from slot machines? Possible? Yes. Probable? No. Sustainable? Absolutely not.
“But don’t covered calls limit my upside?”
They limit your upside to “profitable” instead of “maybe profitable.” Most people can live with that trade-off.
“But isn’t this too complicated?”
Covered calls are literally the simplest options strategy that isn’t gambling. If this seems complicated, maybe that ETF your brother-in-law suggested is a better fit.
“But why doesn’t everyone do this?”
If everyone understood that covered calls were the only consistently profitable options strategy, who would buy all those lottery ticket call options? Those finance bros are good for something.
Key Takeaways
With options you’ve got two choices: keep playing the casino games where the odds are against you, or move to the one table where you’re collecting the house edge. I know which one I’d choose, and I’m literally a jackass (of course Papa always called me a smart ass).
What You’ve Learned:
- Options are contracts giving you rights to buy or sell stocks at specific prices
- Most options strategies are speculation with low success rates
- Covered calls are fundamentally different - you collect income while owning stock
- Time decay works against option buyers but for option sellers
- 75% of options expire worthless, making sellers the consistent winners
What’s Next: Now that you understand why covered calls are fundamentally different from other options strategies, let’s dive into the mechanics of how they work.
Learn exactly how covered calls work in practice, with real examples and current market data that’ll make you wonder why you waited so long to start collecting monthly income.
This is Module 0 of our comprehensive covered call education series.
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