how to buy and sell stock options: Practical Guide

How to Buy and Sell Stock Options

how to buy and sell stock options is a practical question for anyone who wants to trade standardized equity options (U.S. stocks and ETFs). This guide explains what stock options are, why investors use them (income, hedging, speculation), the brokerage approvals and paperwork you’ll need, step-by-step processes for buying and selling, pricing fundamentals, common strategies, risk controls, and resources to practice safely. Read on to get clear procedural checklists and example trade walkthroughs that are beginner-friendly and platform-agnostic while highlighting Bitget tools and Bitget Wallet where relevant.

Basic Concepts and Terminology

Before learning how to buy and sell stock options, understand core terms:

• Option — a standardized contract giving the buyer a right (not obligation) to buy or sell the underlying at a strike price before or at expiration.
• Contract — one option contract typically represents 100 shares of the underlying equity for U.S. listed options.
• Premium — the price paid per share for the option (quoted per share; multiply by 100 for one contract).
• Strike price — the price at which the underlying can be bought/sold if the option is exercised.
• Expiration — the date the option ceases to exist; after expiry it is worthless (if unexercised and out-of-the-money).
• Underlying — the stock or ETF the option references.
• In-the-money (ITM) — a call whose strike is below current stock price or a put whose strike is above current stock price.
• Out-of-the-money (OTM) — call strike above stock price or put strike below it.
• Exercise — buyer uses right to buy/sell the underlying at the strike.
• Assignment — seller of the option is required to fulfill the contract when the buyer exercises.

Types of Options

Calls

A call option gives the buyer the right to buy the underlying at the strike price before (or at) expiration. The buyer pays a premium; the seller (writer) receives the premium and has the obligation to sell the underlying if assigned.

Puts

A put option gives the buyer the right to sell the underlying at the strike price. Buying puts is commonly used as downside protection; selling puts can be a way to buy stock at a discount or to generate income, but exposes the seller to obligation to buy if assigned.

American vs. European style

U.S. equity options are typically American-style, meaning they can be exercised any time up to expiration. European-style options can only be exercised at expiration — these appear more often in index products. When learning how to buy and sell stock options, assume American-style unless stated otherwise.

How Options Are Priced

Intrinsic and Extrinsic Value

Option premium = intrinsic value + extrinsic value.

• Intrinsic value: For calls = max(0, stock price − strike). For puts = max(0, strike − stock price).
• Extrinsic value (time/volatility value): The portion of the premium attributed to time until expiration and expected volatility (implied volatility).

The Greeks

The Greeks quantify sensitivities:

• Delta: option price sensitivity to a $1 move in the underlying (also approximates probability of finishing ITM for near-dated options).
• Gamma: rate of change of delta as the underlying moves.
• Theta: time decay; how much value the option loses each day as expiration approaches.
• Vega: sensitivity to changes in implied volatility; higher vega means option price moves more when IV changes.
• Rho: sensitivity to interest rates (less relevant for short-dated equity options).

Implied Volatility and Its Impact

Implied volatility (IV) is the market’s forecast of expected volatility priced into options. Higher IV increases option premiums (more expensive options). When learning how to buy and sell stock options, note that buying when IV is high raises breakeven and reduces edge; selling premium when IV is elevated can be attractive but carries risk if realized volatility spikes further.

The Options Chain and Reading Market Quotes

An options chain lists strikes vertically and expirations horizontally (or in grouped rows). Key columns include:

• Bid/Ask — current best bid (price buyers will pay) and ask (price sellers want).
• Last — last traded price (may be stale in low liquidity contracts).
• Volume — number of contracts traded that day.
• Open Interest — total outstanding contracts that have not been closed or exercised.
• Strike and Expiration rows

Practical tips: use limit orders in thinly traded strikes, check open interest (higher = better liquidity), compare bid/ask spreads, and look at IV percentiles to know if current IV is low or high relative to history.

Preliminaries — Brokerage, Approval, and Documentation

Choosing a Broker and Platform

Pick a broker based on commissions, platform tools (option chains, Greeks, risk graphs), market data, educational resources, and reliability. When available, prefer brokers that offer robust option analytics and simulated trading. If interacting with web3 wallets or crypto features, consider Bitget and Bitget Wallet for integrated tools — but remember stock options trade on regulated U.S. markets and require a traditional brokerage account.

Options Trading Approval Levels

Brokers use approval tiers that determine the strategies you can use. Typical levels:

• Level 1 — covered calls, buy-to-open long calls/puts.
• Level 2 — cash-secured puts, spreads (verticals).
• Level 3+ — uncovered (naked) calls/puts, complex multi-leg strategies, margin-enabled trades.

Applications ask about trading experience, income, net worth, investment objective, and employment. Approval limits reduce risk for inexperienced traders.

Disclosures and Required Reading

Read the Options Disclosure Document (Characteristics and Risks of Standardized Options) and broker agreements. These documents explain assignment, margin, and settlement rules. Education is essential before learning how to buy and sell stock options.

Step-by-Step: How to Buy Options (Buy to Open)

Step 1 — Formulate an Objective and Timeframe

Decide if the trade is directional (profit from price move), protective (hedge), or speculative (volatility play). Choose an expiration consistent with that timeframe: short-dated for fast moves, longer-dated for larger or more persistent expectations.

Step 2 — Select the Underlying and Strategy

Choose a liquid stock or ETF with tight spreads. For straightforward buys: long call if bullish, long put if bearish. Ensure the option strikes align with your conviction and risk tolerance.

Step 3 — Analyze the Trade

Calculate break-even (for a long call: strike + premium; for a long put: strike − premium). Evaluate Greeks: delta for directional exposure, theta for time decay, and vega if IV movement matters. Use probability calculators and risk/reward graphs to size position and set stop/exit plans.

Step 4 — Enter the Order (order types)

Use a buy-to-open instruction, specify contract quantity (remember 1 contract = 100 shares), choose strike and expiration, and set a limit price. Market orders can fill at unfavorable prices in low-liquidity contracts. Consider Good-Til-Canceled (GTC) or day orders depending on your plan.

Step 5 — Monitor and Manage the Position

Decide exit rules: sell-to-close before expiration to capture profit or limit losses; exercise only when logical (rare for long calls/puts unless deep ITM near expiry). Consider rolling (close and open a different strike/expiration) to extend or adjust risk. Use position sizing rules to limit maximum premium exposure.

Step-by-Step: How to Sell Options (Write / Sell-to-Open)

Covered vs. Naked (Uncovered) Writing

Covered call: you own 100 shares per call written — reduces risk and limits upside. Naked (uncovered) writing exposes you to potentially unlimited loss (for naked calls) and requires higher margin and approvals. Brokers often restrict naked writing to experienced, margin-approved accounts.

Cash-Secured Puts

Sell a put while reserving enough cash to buy the stock if assigned. This approach lets you generate income while potentially acquiring the stock at a discount if the put is assigned. Verify cash availability and margin rules before entering sell-to-open put orders.

Entering Sell Orders and Managing Assignment Risk

When selling options, use sell-to-open. Track risk of early assignment (especially for deep ITM short options or when dividends approach for call writers). Manage positions by buy-to-close when necessary or rolling to another strike/expiration to avoid assignment or adjust risk.

Closing, Exercising, and Assignment

To exit a traded option:

• Sell-to-close — for long positions (releases the option contract).
• Buy-to-close — for short positions (closes your obligation).

Exercise: the holder notifies broker to convert option into underlying shares. Assignment: sellers may be randomly assigned if the buyer exercises. Settlement and exercise cutoff rules vary (typically options stop trading at market close on expiration Friday; some contracts have specific exercise procedures). Check broker notices for final exercise/assignment deadlines and settlement timelines.

Common Options Strategies (Basic to Intermediate)

Single-Leg Strategies

• Long call: bullish, limited loss (premium), unlimited upside.
• Long put: bearish, limited loss (premium), profit if stock falls.
• Covered call: sell calls against owned shares to earn premium and limit upside.
• Protective put: buy put while holding stock to limit downside.

Multi-Leg Strategies

• Vertical spread (bull/bear): buy and sell same-expiry options at different strikes to limit risk and reward.
• Calendar/Diagonal spreads: exploit time decay and differing expirations.
• Straddle/Strangle: buy calls and puts to profit from big moves (volatility plays).
• Iron condor: sell two spreads to earn premium expecting low volatility.
• Collar: hold stock, buy protective put and sell covered call to reduce cost of protection.

Strategy Selection Guidance

Match the strategy to objective: income (covered calls, iron condors), protection (protective puts, collars), directional (long calls/puts, verticals), or volatility (straddles/strangles). Ensure broker approval level covers the chosen strategy.

Risk Management and Margin

Key Risks

• Leverage: options amplify gains and losses; total premium can be lost.
• Total premium loss: worst-case for long options.
• Assignment risk: option sellers may be assigned unexpectedly.
• Gap risk: overnight moves may move underlying past strikes rapidly.
• Execution/counterparty risk: ensure broker reliability and clear settlement procedures.

Position Sizing and Diversification

Limit any single options position to a small percentage of account equity. Use stop-loss or mental exit rules. Diversify across expirations and underlyings to reduce concentrated risk.

Margin Requirements and Account Types

Margin differs by strategy and broker. Writing uncovered options requires margin and higher approval; cash accounts often cannot engage in margin-dependent strategies. Retirement accounts (IRAs) may restrict certain option strategies. Always check with your broker.

Tools, Analytics, and Practice

Option Analytics and Simulators

Use risk graphs, option profit/loss simulators, probability calculators, and Greeks viewers to model outcomes. Paper trading (simulators) lets you test strategies without real money — highly recommended before live trading.

Data and Screening Tools

Use options screeners to find high IV plays, unusual volume, or income-generating candidates. Bitget’s educational materials and platform tools can help traders learn options mechanics; for crypto-related wallets, Bitget Wallet provides secure custody of private keys if you also trade digital assets. Remember: stock options trade on regulated exchanges — use a regulated brokerage account.

Fees, Settlement, and Tax Considerations

Commissions and Fees

Check your broker’s per-contract fees, exercise/assignment fees, and exchange fees. Some brokers offer commission-free option trading but may still charge per-contract fees.

Settlement and Exercise Procedures

Options settle according to exchange rules (usually exercise leads to stock assignment and settlement on standard settlement cycles). Pay attention to last trading day and expiration procedures (often third Friday of the expiration month for standard monthly options) and to automatic exercise thresholds (commonly $0.01 ITM but check broker policy).

Tax Treatment Overview

Options taxation can be complex. Short-term trades generally create short-term capital gains/losses. Exercises and assignments have special tax treatment that affects cost basis of underlying shares. Consult a tax professional for specifics rather than relying solely on general guides.

Regulatory and Investor Protections

Regulatory Bodies and Rules

Options trading is overseen by regulators and clearinghouses. Read materials from the Options Industry Council and FINRA for authoritative, up-to-date rules governing suitability, margin, and disclosures.

Investor Education and Warnings

Options are complex and can produce substantial losses. Read the Options Disclosure Document and use educational resources, demos, and small test sizes when starting out. Before trading, ensure you’ve obtained the proper approval level from your broker.

Example Workflows and Walkthroughs

Example 1 — Buying a Call (Bullish Speculation)

1. Idea: Expect stock XYZ (trading $50) to rise in 6–8 weeks.
2. Objective/timeframe: Directional, 6–8 weeks.
3. Pick strike: Buy 55-strike call expiring in 8 weeks if you expect price > $60 (breakeven = 55 + premium).
4. Order: buy-to-open 1 contract at limit $1.50 (premium = $150 total).
5. Management: sell-to-close if stock rises above breakeven plus target profit; cut losses if price falls and theta erodes premium beyond tolerance.

Example 2 — Writing a Covered Call (Generate Income)

1. You own 100 shares of ABC at $40.
2. Sell-to-open 1 call at strike $45, expiration in one month, receive $0.80 premium ($80).
3. If ABC stays below $45, you keep premium. If ABC rises above $45 and is assigned, you'll sell the shares at $45 and keep premium.
4. Risks: cap upside; assignment before ex-dividend date is possible for calls deep ITM.

Example 3 — Buying a Protective Put (Hedge)

1. Own 200 shares of DEF at $120.
2. Buy two puts (one per 100 shares) at strike $110, 3 months out, pay premium to cap downside below $110.
3. Trade-off: protection costs premium which reduces net return if stock rises.

Frequently Asked Questions (FAQ)

Q: What happens at expiration?

A: Options expire worthless if OTM; ITM options may be exercised (buyer) or automatically exercised per broker rules. Sellers may be assigned; settlements follow exchange timelines.

Q: How many shares per contract?

A: Standard U.S. equity option contract = 100 shares.

Q: How to avoid assignment?

A: Close short positions (buy-to-close) before exercise, avoid deep ITM near expiration, or roll positions. No guarantee to avoid assignment if buyer exercises early.

Q: Can options be exercised early?

A: American-style options can be exercised any time before expiration. Early exercise is rare for calls unless receiving a dividend or for deep ITM positions near expiration.

Glossary

• Premium: Price paid for option per share.
• Strike: Agreed price for exercising option.
• In-the-money: Option with intrinsic value.
• Open Interest: Outstanding contracts not closed or exercised.
• Assignment: Obligation imposed on option seller when buyer exercises.

Further Reading and Resources

Authoritative education pages include the Options Industry Council, FINRA’s options pages, and major broker education centers. For platform-specific tutorials and practice accounts, use your broker’s demo environment and Bitget educational resources to learn interface mechanics in a risk-free way. If you are managing crypto assets or wallets in parallel, Bitget Wallet is recommended for secure custody in the Bitget ecosystem.

Market Context and Data Reference

As of 2025-12-23, according to the market excerpts provided, some notable equity and macro developments illustrate how quickly sectors can shift. For example, Novo Nordisk (NVO) showed a market cap reported around $177B with daily volume noted near 493K on that date; Pfizer (PFE) and Merck (MRK) were also discussed with market caps near $143B and $265B respectively and dividend yields reported in the excerpts. These figures highlight that underlying fundamentals and sector news (e.g., drug approvals, patent cliffs) influence stock prices and therefore option pricing and strategy selection. The crypto market commentary in the excerpts emphasized evolving buyers and volatility profiles for Bitcoin as institutional flows and ETFs changed market structure. These market factors affect implied volatility and liquidity — both central to learning how to buy and sell stock options.

Note: the above figures are from the news excerpts provided and are included only as timely background. For live trading and verified market data, consult real-time exchange feeds and official filings. "As of 2025-12-23, according to the provided market excerpts" contextualizes the snapshot cited here.

Checklist — Before You Trade

• Get options approval from your broker (appropriate level).
• Set clear objective and timeframe.
• Choose underlying, strike, and expiration.
• Analyze Greeks, IV, breakeven, and risk/reward.
• Place order with proper instructions (buy-to-open / sell-to-open, limit price).
• Monitor positions, be ready to close/roll, and follow assignment rules.

Ready to practice? Open a demo account, study the Options Disclosure Document, and follow the checklist above. To learn platform mechanics or integrate wallet features for parallel crypto activity, explore Bitget’s educational center and Bitget Wallet for secure custody in the Bitget ecosystem.

This article is informational and educational. It is not investment advice. Always consult licensed professionals for tax and investment decisions and refer to your broker’s documentation for account-specific rules.