Options trading is the 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 are available on numerous financial products, including equities, indices, and ETFs. Owning an option, in and of itself, does not impart ownership in the underlying security, nor does it entitle the holder to any dividend payments.

Options trading can seem complicated, but it offers investors a range of strategies to profit from trading underlying securities. Some advantages of trading options include downside protection and leveraged returns, while disadvantages include fees or commissions and the potential for unlimited losses. Basic strategies for beginners include buying calls, buying puts, selling covered calls, and buying protective puts. Options trading can also be used as a hedging tool to mitigate potential losses in the event the stocks price goes down.

To trade options, youll need a brokerage account thats approved for options trading. The types of options trades you can place depend on your specific options approval level, which is based on a number of your personal suitability factors. Options trading requires a certain commitment to mastering vocabulary, jargon, and options strategies to trade knowledgeably.