Options trading is a practice of buying or selling options contracts, which are agreements that give the holder the choice to buy or sell a collection of underlying securities at a set price by a specific date. Options are a form of derivative contract that gives buyers of the contracts the right (but not the obligation) to buy or sell a security at a chosen price at some point in the future. Options contracts are available on numerous financial products, including equities, indices, and ETFs.

Options trading can seem more complicated than it is, but it offers more flexibility and liquidity than trading underlying assets. Options are essentially leveraged instruments that allow traders to amplify the potential upside benefit by using smaller amounts than would otherwise be required if trading the underlying asset itself. For example, instead of laying out $10,000 to buy 100 shares of a $100 stock, you could hypothetically spend, say, $2,000 on a call contract with a strike price 10% higher than the current market price.

There are some advantages to trading options for those looking to make a directional bet in the market. If you think the price of an asset will rise, you can buy a call option using less capital than the asset itself. At the same time, if the price instead falls, your losses are limited to the premium paid for the options and no more. Options trading can be used for hedging, speculation, or profit.

Basic strategies for beginners include buying calls, buying puts, selling covered calls, and buying protective puts. Options trading usually comes with trading commissions, which are often a flat per-trade fee plus a smaller amount per contract. To trade options, youll need a brokerage account thats approved for options trading.