Options are a great tool used in trading, and with the right strategy and know-how, they can be incredibly powerful. That being said, novice traders beware because options can be complicated. Especially combined with leverage, options can result in large gains or losses that can leave you with a permeated smile, or high and dry on the side of the road, wishing you had understood your options trades better. If you are curious about how options work or are looking to tune up your existing knowledge, we will take you through how options work and the basic strategies below.
What is an option, really?
An option is a financial contract, part insurance, part wager, part time-sensitive puzzle, that gives you the right, but not the obligation, to buy or sell an underlying asset (in most cases) at a predetermined price before a specified expiration date. Options are a bet on what will happen in the future, and you can make money when the market goes up, and when the market goes down.
At the heart of it, you’re not trading the stock itself. You’re trading the possibility of what that stock might do. That distinction matters because it means you can profit from movement, stagnation, or volatility itself. You’re not just saying, “I think Tesla stock will go up.” You’re saying, “I want to profit if Tesla goes up by a certain amount, within a certain time window, without risking my whole portfolio.”
There are two primary types of options:
| Option Type | What It Does | When to Use |
|---|---|---|
| Call Option | Gives the buyer the right to buy a stock at a fixed price (strike price) within a certain time frame | Use when you think the stock price will go up |
| Put Option | Gives the buyer the right to sell a stock at a fixed price (strike price) within a certain time frame | Use when you think the stock price will go down |
Now here’s where it gets more interesting: you can buy or sell either type of option. That creates four basic building blocks? long call, short call, long put, short put, and from there, you can stack them into all sorts of structures: spreads, condors, straddles, butterflies, and other exotic strategies that sound like a weird animal encyclopedia.
But what gives options their power isn’t just the variety; it’s the mechanics under the hood. Options derive their value from several factors:
- Price movement (delta): If the stock moves in the direction you predicted, your option gains value.
- Time (theta): Options decay as they get closer to expiration. You’re not just trading direction — you’re trading time.
- Volatility (vega): The more volatile a stock, the more valuable the option. Why? Because movement creates more opportunity.
- Interest rates and dividends (rho): Especially in 2025, with rates still mattering, this piece is back in the conversation.
When you trade an option, you’re not just betting on a price move, you’re making a call on when it happens, how much it moves, and how volatile the path will be. Options give you control over timing, direction, and even periods of stability. Used correctly, they help reduce risk, fine-tune exposure, and create new profit opportunities. Used poorly, they can magnify losses quickly.
Why use options strategies in 2025?
Because markets in 2025 aren’t following a script, they zigzag, stall, fake out, and reverse on a dime. The era of smooth trends and obvious trades is long gone. Rates are sticky, geopolitics is noisy, AI stocks are the hottest thing ever hot until they’re not, and earnings moves swing harder than ever. In this kind of landscape, traditional buy-and-hold strategies often leave investors either overexposed or sitting on dead capital. That’s where options step in.
Here’s why savvy traders and portfolio managers are leaning into options now more than ever for investing in big names like Tesla and smaller players like BBAI.
Hedge your positions
Markets don’t care about your optimism, they revolve around sentiment and the real economy. Even a great long-term portfolio can take damage in the short term. Options offer a flexible way to protect your downside without hitting the panic-sell button. Whether you’re holding tech through an election cycle or small caps during rate hikes, a simple protective put can cap your risk while keeping your upside intact.
Generate yield
A flat portfolio doesn’t have to be a quiet one. Selling covered calls or cash-secured puts lets you get paid while you wait. If your stocks aren’t moving much or you’re waiting for better entry points, options can turn idle capital into monthly income. It’s one reason why even conservative funds are using options overlays in 2025 to boost returns without adding risk.
Bet on volatility
Sometimes the play isn’t about direction, it’s about chaos. If you think a stock is about to make a big move but don’t know which way, you can build a position that profits from movement itself. Strategies like straddles and strangles are tailor-made for earnings season, CPI weeks, Fed decisions, or meme stocks with too much Reddit heat and not enough logic.
Amplify exposure
Want to control 100 shares of Nvidia without dropping $85,000? Options let you do that for a fraction of the cost. With the right strategy, you can take directional bets, hedge a concentrated position, or even mimic a stock position using far less capital. That said, leverage works both ways. The upside is real, but so is the burn if you’re wrong. So use it with intent, not impulse.
How to trade options: Basic strategies.
You don’t need a background in derivatives or a trading desk setup to start using options effectively. These four core strategies form the foundation of most options trading, and they’re widely used by both individual investors and professionals alike.
Covered call
A covered call involves owning shares of a stock and selling a call option against those shares. This allows you to earn a premium from the buyer of the call. If the stock stays below the strike price through expiration, you keep both the premium and your shares. If the stock rises above the strike price, you may be required to sell the stock at that price, potentially capping your upside.
The model below shows how a covered call performs across different stock prices at expiration, including the capped upside and premium income:
| Stock Price at Expiration | Outcome | Total Profit/Loss |
|---|---|---|
| $95 | Stock drops, call not exercised | -$3 (loss on stock) + $2 premium = -$1 |
| $100 | Stock flat, call not exercised | $0 (no gain on stock) + $2 premium = $2 |
| $105 | Stock hits strike, call exercised | $5 (stock gain) + $2 premium = $7 |
| $110 | Stock above strike, upside capped | $5 (stock gain capped) + $2 premium = $7 |
Protective put
This strategy involves buying a put option while holding a stock position. It serves as a form of insurance. If the stock drops below the strike price, the put option increases in value and can offset the losses on the stock.
Here’s a model to visualize how a protective put limits downside while preserving the potential for gains:
| Stock Price at Expiration | Outcome | Total Profit/Loss |
|---|---|---|
| $90 | Put in the money | -$10 (stock loss) + $5 (put value) – $2 premium = -$7 |
| $95 | Put at the money | -$5 (stock loss) + $0 (put breakeven) – $2 = -$7 |
| $100 | Stock flat, put worthless | $0 (stock) – $2 premium = -$2 |
| $105 | Stock up, put expires worthless | +$5 (stock gain) – $2 = $3 |
Long call
A long call means purchasing a call option with the expectation that the underlying stock will increase in price. If the stock price rises above the strike price plus the premium paid, the position becomes profitable. If the stock doesn’t move or drops, the maximum loss is the premium.
This model shows the breakeven point and profit potential when using a long call:
| Stock Price at Expiration | Outcome | Total Profit/Loss |
|---|---|---|
| $95 | Below strike, call worthless | – $3 premium = -$3 |
| $100 | At strike, call worthless | – $3 premium = -$3 |
| $105 | Call exercised, gain of $2 | $5 (gain) – $3 premium = $2 |
| $110 | Call deep in the money | $10 gain – $3 premium = $7 |
Long put
Buying a long put gives you the right to sell a stock at a specific price, making it profitable if the stock price drops below that level. It’s often used to speculate on a decline in a stock’s value or to hedge an existing long position.
Use this model to see how a long put benefits from a falling stock, with limited risk:
| Stock Price at Expiration | Outcome | Total Profit/Loss |
|---|---|---|
| $105 | Put out of the money | – $4 premium = -$4 |
| $100 | At strike, no intrinsic value | – $4 premium = -$4 |
| $95 | Put in the money | $5 (gain) – $4 = $1 |
| $90 | Stock drops more | $10 gain – $4 = $6 |
Mid-level strategies for trading options
Once you understand the basics of buying calls and puts, the next step is learning how to combine them into more advanced strategies. These are often called multi-leg strategies because they involve two or more options contracts working together to shape a specific risk/reward outcome.
Mid-level strategies are designed to:
- Limit losses in exchange for limited gains
- Target specific market conditions (bullish, bearish, neutral, or volatile)
- Reduce cost compared to single-option trades
- Improve control over time decay and volatility
Here’s a breakdown of the most widely used mid-level strategies, what they’re designed for, and when they’re best applied:
| Strategy | Market View | Risk | Reward | Best Used When |
|---|---|---|---|---|
| Bull call spread | Moderately bullish | Limited to net premium paid | Limited to difference between strikes minus premium | You expect a modest rise in the stock’s price within a set time frame |
| Bear put spread | Moderately bearish | Limited to net premium paid | Limited to difference between strikes minus premium | You expect a moderate decline and want defined risk |
| Iron condor | Neutral or range-bound | Limited to net loss between spreads | Limited to net credit received | You believe the stock will stay within a tight range until expiration |
| Straddle | Highly volatile, direction unknown | High (cost of both options) | Unlimited upside; substantial downside protection | You expect a large move in either direction (e.g., before earnings or major news) |
| Calendar spread | Neutral short-term, potential move long-term | Low to moderate | Moderate | You expect little near-term movement but anticipate future volatility |
How options strategies work using examples
Understanding the theory behind options is important, but seeing how they actually play out in real market scenarios makes them much easier to apply. Below are a few real-world examples showing how basic and mid-level options strategies work, including the potential risks and rewards investors should consider.
Example 1: Using a long call to amplify upside
Suppose you’re optimistic about Nvidia (NVDA),, because of its quantum computing potential, but buying 100 shares outright at $850 each would cost $85,000, far more than you want to invest. Instead, you buy a call option with a $870 strike price, expiring in 30 days, for a premium of $9 per share (or $900 total, since each option contract covers 100 shares).
- If NVDA rises above $870, your call option gains value.
- If NVDA climbs to $900, you can either exercise the option to buy at $870 or sell the call at a profit.
- If NVDA stays flat or declines, you lose the $900 premium, your maximum possible loss.
Summary
Example 2: Using a bear put spread to bet on a decline
You believe Tesla (TSLA) will report disappointing earnings, but you don’t want to take unlimited risk by shorting the stock outright. Instead, you set up a bear put spread:
- Buy a $180 put and sell a $160 put, both expiring at the same time.
- The cost of the trade (net premium) is $4 per share, or $400 total.
- If TSLA falls below $160 by expiration, your maximum gain is $16 per share (the $20 difference between strikes, minus the $4 cost).
- If TSLA stays above $180, you lose the $400 premium.
Summary
Example 3: Using an iron condor to profit from stability
You believe that a stock (say Microsoft, MSFT) is unlikely to move much over the next month. To capitalize, you open an iron condor:
- Sell an out-of-the-money call and an out-of-the-money put (close to the current stock price).
- Buy a further out-of-the-money call and put to protect against large moves.
- The goal is for the stock to stay within the range defined by the short strikes through expiration.
- If the stock trades inside that range, you keep the full premium.
- If the stock moves sharply up or down, losses are capped by the long options you bought for protection.
Summary
Matching your options strategy to the market
Remember, if you are trading options, you are making a bet, and sometimes that bet will pay off, and sometimes it won’t. Sometimes it will pay off so big it’s as if it’s on board a SpaceX rocket, launching into space. Generally speaking, however, you should always consider the current state of the market and where exactly it is headed before you invest. Meaning, in a bear market it might be best to buy put options,s and in a booming market it might be smart to buy call options. As mentioned above, options have all sorts of formations and strategies, and when used along with other technical analysis, they can offer a great return when used alongside leverage.
FAQ
Do I need a margin account to trade options?
It depends on the strategy. Basic strategies like buying calls and puts can often be done in a cash account, but anything involving selling options, especially spreads, typically requires a margin account. Brokerages will also assign you an options trading level based on your experience and financial profile, which determines what you’re allowed to trade.
Benjamin writes about finance, real estate, business, economics and most things business or investment related, for publications such as The Motley Fool, SuperMoney, and Joy Wallet. Hailing from Denver, Colorado, he spent 15 years in East Asia heavily involved in both the financial services and real estate industries. He enjoys writing about all the interesting ways this great spinning ball that we call earth works; particularly when it comes to the intersection of business, trade, finance, and history. Read Full Bio
