The appeal of options trading is the “leverage” they provide.
Since 1 option contract controls 100 shares of the underlying asset, buying a call option contract exposes the gains and losses of 100 shares at a fraction of the price of 100 shares.
In this article, we will cover option contract trading. Since you've made it to this article, I assume you already know what "option contracts" are. I skip covering what an "option contract" is because that information is available everywhere online.
For the retail traders
“call options” and “put options” for retail traders are bets on the direction of the asset price.
They purchase a “call option” if they believe the price will increase
They purchase a “put option” if they believe the price will decrease.
(Please do not do this. You will lose your money. It will gradually become a generous contribution to a hedge fund manager’s whine collection)
You have learned in school, on television, or YouTube how to visualize atoms, protons, neutrons, electrons, etc.
This model is entirely inaccurate, yet we use it because it helps us visualize the specifics of these abstract subjects.
Consider everything in this article to be an oversimplification to assist you with more advanced reading about options trading
Unfortunately (or fortunately), retail traders like you and I do not have access to leverage as institutions have. Typically, if you are trading stocks, your broker will enable you to borrow the value of your portfolio.
If you have $6,000 in your Robinhood account, the maximum amount you may borrow is $6,000. The leverage of 2x is relatively low. Thus, retail traders…