The four ideas
Call and put
A call gains value when the underlying rises; a put gains value when it falls. Buying either costs a premium, and that premium is the most a buyer can lose.
Strike
The price the option is measured against. A call only has intrinsic value above its strike; a put only below it.
Expiry
The date the contract settles. Before it, an option carries time value. After it, it is worth only its intrinsic value, which is often nothing.
Premium
What the option costs. It is made of intrinsic value plus time value, and time value shrinks every day — faster as expiry approaches.
The mistakes that cost the most
- Buying far out-of-the-money options because they are cheap. They are cheap because they usually expire worthless.
- Ignoring decay. Being right about direction but late about timing still loses money.
- Trading expiry day for the cheap premiums, which is the fastest-moving and least forgiving session of the week.
- Writing options without understanding that the loss is not capped the way a buyer's is.
- Sizing by what you can afford rather than by what you can afford to lose.
A first month that does not cost anything
Spend the first week only watching: open the live option chain, pick a strike, and check it again at the end of the day without trading it. Note how much the premium moved relative to the index.
In the second week, buy one lot of an at-the-money option on a simulator and hold it for a full day so decay is something you have felt rather than read about. In the third, add a stop-loss and a target to every trade. In the fourth, open Analysis and look at what your own record says rather than what you remember.
None of this requires money. All of it requires the market to be real, which is the one thing a simulator has to get right.
Frequently asked questions
How much money do I need to start learning options?
To learn, none. Trade Monky's virtual funds and live option chain are free. Live trading later requires real margin, which is one more reason to know your numbers first.
Should beginners buy options or write them?
Buying caps the loss at the premium paid, which makes it the more forgiving place to learn. Writing requires more margin and carries larger losses if the position moves against you.
Is options trading gambling?
It becomes gambling without a defined entry, exit and size. With those, it is a risk business. The difference is visible in a trade history, which is why keeping one matters.
How long before I should trade live?
There is no fixed answer, but a useful test is a few dozen simulated trades where you followed your own plan — not where you made money.