Getting Started with Trading Options: A Practical Introduction to Put and Call Strategies

Learning how to start trading options can seem intimidating at first, but the core strategies follow predictable patterns that investors have used for decades. Options trading offers two primary income-generation approaches: selling protective positions and collecting premiums, or purchasing upside participation through call buying. Understanding these mechanics is essential before executing your first trade.

Understanding Put Options: How to Start Selling Puts for Income

One fundamental trading strategy involves selling put options on stocks you’re willing to own at a discount. Consider a scenario where a stock is currently trading at $35.70 per share. A trader might sell a put option at a $35 strike price, collecting a $0.04 premium per share. For an investor interested in purchasing stock at a discount, this approach offers an attractive alternative to buying at market price. By selling the put, the trader commits to purchasing 100 shares at $35 if the option expires in-the-money, but effectively reduces their cost basis to $34.96 after collecting the premium.

The mathematics here is important: that $0.04 premium on a $3,500 cash commitment represents an annualized return of 0.83% if the put expires worthless. Statistical analysis of similar positions suggests a 61% probability the option won’t be exercised, making this a reasonable probability-weighted trade. Options traders refer to this additional return boost as the “YieldBoost” advantage—collecting premium income regardless of directional movement.

When selling puts, strike selection matters significantly. A strike price positioned 2% below current trading price carries substantially better odds of expiring worthless compared to deeper out-of-the-money strikes. However, that protection comes at the cost of reduced premium collection.

Covered Call Trading Strategy: Generating Returns from Existing Positions

The covered call represents the mirror image strategy and serves as the second essential approach for options traders to understand. This strategy works for investors who already own shares or plan to purchase them at market price.

Suppose you purchase 100 shares of the same stock at $35.70. You simultaneously sell a call option at the $37 strike price, collecting a $0.09 premium. In exchange, you commit to selling your shares at $37 if the option gets exercised before expiration. The total return from this position reaches 3.89% if your shares get called away—combining the $1.30 stock appreciation with the $0.09 premium collected.

The tradeoff here is clear: while you capture 3.89% return if stock prices rise moderately, you miss any gains above the $37 strike. This makes covered calls appropriate for investors with neutral to mildly bullish market outlooks rather than those expecting significant appreciation.

A $37 strike representing 4% above the current stock price carries roughly 52% probability of expiring worthless based on standard options analytics. Should the option expire without exercise, you retain both your shares and the $0.09 premium—adding 1.84% annualized return to your position (the additional YieldBoost component).

Evaluating Option Contracts: Key Metrics for Traders

Successfully evaluating options contracts requires understanding several interconnected variables. Implied volatility—the market’s expectation of future price movement—typically ranges between 43-47% for individual stocks. Put options in a given stock might show 47% implied volatility while calls show 44%, reflecting different market expectations for downside versus upside moves.

Actual historical volatility calculated across 251 trading days provides another benchmark. Comparing implied volatility against realized volatility helps traders identify whether options appear relatively expensive or cheap. When implied volatility significantly exceeds realized volatility, selling options becomes more attractive. The inverse situation favors option buyers.

Greek values—particularly delta, gamma, and theta—quantify how option prices respond to stock movements, time decay, and volatility changes. Understanding these sensitivities prevents traders from misunderstanding their position’s actual risk profile.

Stock price history over the trailing twelve months provides essential context. Reviewing where your selected strike price sits relative to historical support and resistance levels informs whether your strike represents a realistic probability outcome or an outlier scenario.

Building Your First Option Trading Plan

Before executing your first options trade, establish clear decision criteria. Determine whether you’re pursuing income generation through premium collection (put selling, covered calls) or speculative directional plays (long calls, long puts). Calculate the cost basis or return thresholds in advance rather than deciding post-execution.

Position sizing matters equally in options trading. Many professionals limit individual option positions to 2-5% of total account value, allowing for recovery if multiple trades move against them. This conservative sizing prevents catastrophic losses from emotional revenge trading after losses.

Utilize broker research tools and educational resources to track how probabilities evolve as expiration dates approach. Most options analysis platforms display probability charts showing how your odds of maximum profit have changed since entry, helping you decide whether holding or closing positions makes sense.

Begin with liquid, widely-held stocks where options spreads remain tight and price discovery happens efficiently. Avoid jumping to complex strategies—master puts and covered calls before exploring spreads, butterflies, or other multi-leg combinations. The foundational strategies provide the income generation and risk management benefits most individual traders need.

Remember that options trading involves risk, including the possibility of losing more than your initial investment in some scenarios. Paper trade first using simulations before risking real capital, giving yourself practice identifying quality setups without financial pressure.