A Beginner’s Guide to Options

Options have gone from obscure financial tools used by professional traders to one of the most popular instruments in the modern investing world. With the rise of commission-free apps, Reddit-fueled speculation, and zero-day options (0DTE), options trading has exploded in volume and visibility. But before diving into why options are dominating markets, let's take a step back. What are options, where did they come from, and why are they so powerful?

What Are Options?

An option is a type of financial contract that gives the buyer the right - but not the obligation - to buy or sell an asset at a predetermined price (called the strike price) before or on a specific date (called the expiration date). There are two main types of options:

• Call options give the holder the right to buy the asset.
• Put options give the holder the right to sell the asset.
  

Traders pay a premium for this right, and each option contract typically controls 100 shares of the underlying stock. What makes options unique is their leverage. With a relatively small premium, traders can control a much larger notional position. That's part of what makes them attractive - but also risky.

A Brief History of Options Trading

The roots of options trading go back much further than most people realize. In fact, one of the earliest known uses of options dates back to Ancient Greece. The philosopher Thales of Miletus is said to have predicted a bountiful olive harvest and secured the rights to use local olive presses in advance - essentially using a form of call options to lock in future profits.

In the modern world, options trading took off with the founding of the Chicago Board Options Exchange (CBOE) in 1973. That same year, economists Fischer Black and Myron Scholes introduced the Black-Scholes model, which made it easier to price options contracts. Together, these innovations helped standardize the market and opened the door for broader institutional adoption. Through the 1990s and early 2000s, the rise of online brokerages brought options to retail investors. But the real tipping point came in the 2020s.

Why Traders Use Options

Options are incredibly versatile and can be used in many ways depending on a trader's goals, experience, and risk appetite. Here are a few of the most common reasons traders use options:

1. Leverage: Options allow you to control 100 shares of a stock for a fraction of the cost of buying those shares outright. This leverage means that even small moves in the underlying stock can result in outsized gains - or losses.
2. Hedging: Professional traders and institutions often use options as a form of insurance. For example, if you own a stock and want to protect yourself from a potential downturn, you can buy a put option to limit your downside.
3. Speculation: Options allow traders to bet on the direction of a stock's price without actually owning the stock. This speculative use of options became especially popular during the meme stock craze.
4. Income Generation: Some traders sell covered calls or cash-secured puts to generate consistent income. These strategies work best in flat or mildly trending markets and are common among long-term investors.
5. Event-Driven Trades: Options are often used to capitalize on volatility around specific events like earnings announcements, FDA approvals, or macroeconomic data releases. Their ability to define risk makes them ideal for high-impact moments.

The Rise of Options Trading in the 2020s

The last few years have seen an unprecedented explosion in options trading, especially among retail investors. Several key factors contributed to this boom:

• Zero-commission trading became the norm, removing one of the biggest barriers to entry.
• Mobile trading apps like Robinhood made it easier than ever to buy and sell options with just a few taps.
• Social media communities, particularly Reddit's WallStreetBets, made options trading feel like a cultural movement.
• The rise of weekly and daily options, especially 0DTE (zero days to expiration) contracts, attracted short-term traders looking for fast gains.
  

Today, options volume often exceeds stock volume by notional value, and some days see trillions of dollars in options turnover, especially in the S&P 500 index. Retail investors now account for a significant portion of that volume.

The Double-Edged Sword: Why Options Are Risky

With great power comes great responsibility. Options offer amazing flexibility, but they are also highly complex. Many new traders misunderstand the risks and end up making costly mistakes. Here are a few of the most common risks with options:

• Theta decay: As time passes, the value of an option can decrease, even if the stock doesn't move. This is especially true for out-of-the-money contracts.
• Volatility crush (vega risk): After earnings or news events, implied volatility can drop sharply, causing options to lose value even if the trader's direction was correct.
• Gamma exposure: Near expiration, options can become extremely sensitive to small price changes, making them volatile and difficult to manage.
• Total loss of premium: Unlike stocks, options can expire worthless. If the trade doesn't work, the entire premium can be lost.
  

Still, with proper education and risk management, options can be a powerful tool for traders and investors alike.

What's Next for Options?

As of 2025, the options market shows no signs of slowing down. In fact, it is likely to become even more central to how both institutions and retail investors approach the markets. Here are a few trends to watch:

• 0DTE options are now the most traded expiration type in the S&P 500, and we may soon see even shorter-duration contracts, such as hourly expirations.
• Retail-focused ETFs that sell options for income - like JEPI, QYLD, and new 0DTE income strategies - are growing rapidly.
• AI and algorithmic trading strategies are increasingly analyzing options flow to gain an edge on market sentiment.
• Regulators may step in with more oversight, especially as retail participation in leveraged options strategies continues to grow.

Final Thoughts

Options trading has evolved from a niche strategy to a core component of modern investing. Whether you're using them for protection, speculation, or income, options can enhance your strategy - if you understand them. The rise of 0DTE contracts and retail participation has added new energy (and risk) to the market, but the tools are here for anyone willing to learn. If you're just starting, focus on education, practice with small positions, and never trade options with money you can't afford to lose.