How Does Options Trading Work? | Options Trading Explained – Options Trading with David Jaffee
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Options Trading

How Does Options Trading Work?

Calls, puts, naked options, wheel strategies…If you are new to options trading, you may be wondering what it all means. 

There is a lot that goes into trading options, and many new traders find themselves wondering how options trading works.

David Jaffee of has been successfully trading for more than 10 years and now offers one of the best online options trading courses for beginning and advanced options traders. 

If you want to learn how to make money trading options, the best options trading strategy, and how to manage your risk, you need to understand how options trading works.

Keep reading to learn more about options trading basics, including whether you should buy or sell options. 

What are options? 

Starting from square one, it is important to know exactly what you are trading. 

Options trading obviously involves options, but just what are they?

Options are derivatives of an underlying, which refers to stocks (or indices) in most cases. 

As financial tools, the value of an options contract is based on the value of the underlying security. 

Options contracts can be bought and sold, providing an opportunity for options traders to be long, or short, the underlying asset while using leverage (and improved capital efficiency).

Options give the trader the right, but not the obligation, to buy or sell the underlying asset at a set price and date. 

In essence, the trader has the option to exercise the contract or not. 

Options contracts consist of an underlying asset, a strike price, and an expiration date. 

Investors use options to increase their income, speculate on the stock market, and hedge their risk. 

Typically, an options contract consists of 100 shares of an underlying stock, however, options can be written for other assets like bonds, currencies, indices and commodities. 

Buying Options

When you buy an option, you have the right to buy or sell the underlying asset at the specified price on or before the expiration date. 

You pay an option premium to purchase the option, and you can exercise the contract by the expiration date. 

For call options, the buyer can purchase 100 shares of the underlying asset if they choose to do so at the strike price.

For put options, the buyer can sell 100 shares of the underlying asset, at the strike price. 

Many traders buy options as part of their strategy (for either hedging or speculative purposes), but David Jaffee does not recommend it often, unless the stock market is trading at a price extreme.

Buying options is not the best way to become a profitable trader, although buying options is necessary to hedge and reduce portfolio volatility.

While there is a high potential payoff, there is a low probability of success when it comes to buying options. 

David Jaffee often compares buying options to gambling. You could win big, or you could lose it all - however, as stated previously, it's vitally important to buy options during periods of complacency to mitigate drawdowns and reduce portfolio volatility.

One of the reasons for this is that actual volatility is almost always less than the expected volatility. 

However, actual volatility is more than expected volatility, the magnitude of the move can wipe out all your profits, as a result, it's important to buy options during periods of complacency and when VIX is low. 

Despite what some options trading coaches say, you don't want to buy options all the time, just like you don't want to sell options all the time.

There is a time to buy and sell options (primarily it's best to be contrarian and sell options when they're expensive and buy options when they're cheap).

Selling Options

When you sell an option, you collect premium from the option buyer. 

The seller gets to keep the option premium regardless of whether the buyer exercises the contract or not.

David Jaffee encourages his students to sell options as the best options trading strategy because you can consistently earn a profit while achieving a high win rate. 

You can make money trading options when you sell options.

When selling options, there is a lower potential payoff but there is also a high probability of success. 

It is also easier to manage risk and win up to 98% of your trades when selling options. 

It is important to note, though, that option sellers must limit their risk on the few trades that will undoubtedly go against them. 

Greed is often the biggest challenge when selling options. 

Winning most of your trades can make it tempting to trade too big or too often.

Instead, David Jaffee recommends discipline and consistency when selling options to win the majority of your trades and successfully manage your losses. 

If buying options is like gambling, then selling options can be compared to acting like a casino or insurance company.

However, there is a time and place to BUY options. Sometimes put options become underpriced when the market becomes euphoric. During times like these, it's important to buy options to reduce portfolio volatility.

When trading options, it's important to have a a proper risk management system in place. One of the best ways to mitigate losses is to buy options. 

Selling options offers consistent profitability, and David Jaffee’s options trading course walks you through the complete strategy.

While selling options certainly requires discipline and patience, it is an easy strategy to implement and refine over time. 

How to Trade Options 

If you are searching for the best way to trade options or the best options trading strategy, selling options is your answer (and also buying options a few times a year to mitigate portfolio volatility).

Both beginner and advanced traders can find considerable success with selling options because the probabilities of profit are in your favor. 

David Jaffee has taught more than 1,500 students how to maximize their potential for profit and mitigate risk when trading options and selling options. 

Learn more about how options trading works at

Frequently Asked Questions (FAQs)

How does option trading work?

Options trading is the practice of buying or selling options contracts (either puts or calls). These contracts 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. Investors can, but don't have to, own the underlying security to purchase or sell an option.

In general, it's best to sell options, however there are times when it's necessary to buy options to mitigate losses.

How does option trading work with example?

Options trading is often used to hedge stock positions, but traders can also use options to speculate on price movements. For example, a trader might hedge an existing bet made on the price increase of an underlying security by purchasing put options.

Or, if a trader believes that a stock will not fall below a certain point, then a trader can sell a put option and then take ownership of that stock at the strike price.

How do options work for beginners?

Options are a form of derivative contract that gives buyers of the contracts (the option holders) the right (but not the obligation) to buy or sell a security at a chosen price at some point in the future. Option buyers are charged an amount called a premium by the sellers for such a right.

Beginning options traders must closely monitor their buying power and ensure that they aren't placed in a margin call.

Is options trading a good idea?

Options provide more leverage and can lead to greater gains.

However, it's important to manage risk when trading options.

Options can also be used as a hedge against market volatility.

How can I learn about options trading?

You can learn about options trading through and also the BestStockStrategy YouTube channel -

About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel​. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at My personal website is

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