What Is Options Trading? The Complete Beginner Guide
Most people hear "options trading" and think one of two things: either it's a lottery ticket for degenerate gamblers, or it's some Wall Street black magic only available to professionals. Neither is true.
Options trading is one of the most powerful — and most misunderstood — tools available to retail traders. When used correctly, it lets you generate returns of 100%, 200%, or even 300%+ on moves that might only return 10–15% if you had just bought the stock.
This guide covers everything you need to know to get started.
What Is an Options Contract?
An options contract is a legal agreement that gives you the right — but not the obligation — to buy or sell 100 shares of a stock at a specific price (the strike price) before a specific date (the expiration date).
You pay a fee upfront for this right. That fee is called the premium, and it's the most you can ever lose on the trade.
Think of it like this: imagine a house is currently worth $400,000. You pay the seller $5,000 for the right to buy that house at $400,000 within the next 6 months. If the house rises to $500,000, you exercise your right, buy at $400,000, and instantly have $100,000 in equity. If the house drops in value, you walk away — and your only loss is the $5,000 you paid upfront.
Options on stocks work exactly the same way.
Why Trade Options Instead of Stocks?
The core advantage of options is leverage. You control 100 shares of stock while only paying a fraction of the total cost.
Real example from our portfolio:
In February 2026, PayPal (PYPL) was trading at $42. Instead of buying 100 shares of stock at $4,200, we bought 3 call option contracts at $0.95 each — a total cost of $285.
Four days later, after PYPL moved to around $47, those options were worth $2.96 each. We sold for $888 total.
+212%
$285 invested → $888 returned → $603 profit in 4 days
| Stock Buyer | Options Buyer | |
|---|---|---|
| Capital Needed | $4,200 | $285 |
| Return | +11.9% ($500) | +212% ($603 profit) |
Same stock. Same move. Completely different result.
The Two Types of Options
There are only two types of options contracts:
- Call Options — You buy a call when you believe the stock price will go UP. It gives you the right to buy 100 shares at the strike price.
- Put Options — You buy a put when you believe the stock price will go DOWN. It gives you the right to sell 100 shares at the strike price.
At TarsierAlpha, we exclusively trade call options — buying the right to purchase quality stocks when they're beaten down and positioned to bounce higher.
The 3 Key Numbers in Every Options Contract
Every options contract is defined by three numbers:
- Strike Price — The price at which you have the right to buy the stock
- Expiration Date — The deadline by which the stock must move for you to profit
- Premium — What you pay upfront for the contract (multiplied by 100 for total cost)
How You Win, Lose, and Exit
Scenario 1 — You Win: The stock moves above your strike price before expiration. You sell your contract at a profit. You don't need to buy the 100 shares — you simply sell the contract itself.
Scenario 2 — You Cut the Loss: The stock moves against you. Rather than holding until expiration and losing everything, you sell the contract early and recover a portion of your premium. This is the disciplined move.
Scenario 3 — Expires Worthless: The stock never reaches your strike price before expiration. Your contract goes to $0. You lose 100% of the premium you paid — and nothing more. Your maximum loss is always capped.
What You Need to Get Started
- A brokerage account with options trading enabled (we recommend Robinhood for beginners)
- Level 2 options approval (allows buying calls and puts)
- Understanding of the Greeks (Delta, Theta, IV, Gamma)
- A strategy — not a guess
Next step: How to Get Options Approved on Robinhood