Options from zero
What options are, why people sell them, and what can go wrong, in plain English. Read this first. Failure Model assumes you already know it.
- Open a broker account and enable options. Wealthsimple in Canada, tastytrade in the US.
- Pick a stock you'd be fine owning, where 100 shares fits comfortably in your cash.
- Work out your worst case in dollars, then sell one small put well below the price.
- Watch it every day: how the premium decays, and how it moves when the stock does.
- Be ready to take delivery of 100 shares. If the stock closes below your strike, you buy them at the strike price.
A way to learn, not a trade recommendation. What you sell, and when, is your call. Keep it small enough that a loss teaches you something without hurting.
How to read the chain →What an option is
An option is a contract about a stock. It gives the buyer the right, but not the obligation, to buy or sell 100 shares at a set price before a set date.
The closest everyday comparison is insurance. The buyer pays a fee up front for protection or a shot at upside. The seller collects that fee and takes on the obligation if the bad (or good) thing happens.
- Strike: the set price in the contract.
- Expiry: the date the contract ends.
- Premium: the price of the option, paid by the buyer to the seller.
- One contract = 100 shares. A premium quoted at $1.50 costs $150.
Calls and puts
There are only two kinds of option. Everything else is combinations of these.
The buyer profits if the stock goes up past the strike. The seller keeps the premium if it doesn't.
The buyer profits if the stock falls below the strike. The seller keeps the premium if it doesn't.
Every option has a buyer and a seller. The buyer pays premium and has limited loss (they can only lose what they paid). The seller collects premium and takes on the obligation. That's the side I trade.
Read an options chain and think about risk
The options chain is the menu: every strike and expiry you can trade, with prices. Every broker shows one. Here's a simplified chain of 30-day puts on a made-up stock trading at $100.
| Strike | Bid | Ask | Delta | IV | OI |
|---|---|---|---|---|---|
| $100 | 3.40 | 3.50 | −0.50 | 32% | 5,210 |
| $95 | 1.60 | 1.68 | −0.30 | 34% | 3,870 |
| $90 | 0.72 | 0.78 | −0.16 | 36% | 4,450 |
| $85 | 0.30 | 0.35 | −0.07 | 39% | 1,920 |
Numbers are made up for teaching. Real chains show more columns; these are the ones that matter first.
What each column means
- Strike: the price in the contract. For a put, it's the price you'd have to buy at.
- Bid / Ask: sellers get roughly the bid; buyers pay roughly the ask. Multiply by 100 for the dollar amount. A tight gap between them (here 6 to 10 cents) means you'll get a fair fill. A wide gap costs you every time you trade.
- Delta: a rough guide to the odds of the option finishing in the money. The $90 put at −0.16 has about a 16% chance.
- IV: how much movement the market is pricing in. Notice it rises at lower strikes: the market charges more for crash protection.
- Open interest (OI): how many contracts are open. Higher usually means easier trading.
Now think about risk: the highlighted row
Say you sell the $90 put and get the $0.72 bid. Before clicking anything, write this out:
Look at every trade from the loss side first. "I make $72 most of the time" is the easy part. "Am I fine losing $928 on this, and do I want to own 100 shares at $90?" is the real question. If the answer is no, skip the trade.
Why sell options instead of buying them
Options lose value as time passes, all else being equal. That slow melt is called time decay (theta). Buyers fight it every day. Sellers collect it.
Options also tend to be priced for more movement than actually happens. The market pays up for protection, the way people overpay a little for insurance. Sellers are paid for taking that fear off other people's hands.
Selling options is being the insurance company. You win small and often, and occasionally you pay out big. The whole skill is surviving the big payouts: picking what to insure, how much, and when to walk away. That's what Failure Model is about.
The two beginner trades
These are the two ways most people start selling options, because the worst case is owning or selling stock, not an open-ended loss.
1. Covered call: rent out shares you own
You own 100 shares and sell a call above today's price. You collect premium. If the stock rises past the strike, your shares get sold at the strike.
2. Cash-secured put: get paid to wait for a lower price
You sell a put below today's price and set aside enough cash to buy the shares. You collect premium. If the stock falls below the strike, you take delivery of 100 shares at the strike.
Do these back to back (sell puts until you take delivery of shares, then sell calls on them) and it's called the wheel.
Entries and exits
The exit is where money is kept or lost. Decide how you'll get out before you get in.
Getting in
- A stock you'd own at the strike, with a tight bid-ask gap, where one contract fits your cash.
- Start around 20 delta. In the chain above, between the $95 and $90 puts.
- Limit order near the middle, never a market order. For the $90 put, ask 0.75 and come down a cent or two.
Getting out
Cutting. Rolling a broken trade for months just delays the loss and usually makes it bigger. And don't close winners early out of nerves: you give up the decay you were paid to wait for.
What can go wrong
- The premium is small next to the risk. A put that pays $180 can cost you thousands if the stock falls hard.
- Stocks gap. Earnings or news can move a stock 20% overnight, straight past your strike, with no chance to react.
- Covered calls cap your upside. If the stock rips, you watch it go without you.
- Naked selling (no shares or cash behind it) can lose far more than the premium. A short call has no maximum loss in theory. Don't start here.
- Margin can force you out. On margin, your broker can close positions at the worst time if the account runs short.
- Assignment can happen early. US stock options can be exercised before expiry, not only on the last day.
Words you'll see
- ITM / OTM
- In the money / out of the money. A call is in the money when the stock is above the strike; a put is when the stock is below it. Sellers usually sell out of the money.
- Theta
- Time decay: how much value the option loses each day. The seller's friend.
- DTE
- Days to expiry.
- Assignment
- When the buyer uses the option and you have to follow through: take delivery of 100 shares (put) or hand them over (call).
- Strangle
- Selling a put below and a call above the price at the same time. More premium, more ways to lose. An intermediate trade.
Where to start: brokers
Pick a broker with a clear options chain and low costs. These are the two I'd point a beginner to.
Wealthsimple- No commission per options contract.
- Covered calls and cash-secured puts in a TFSA or RRSP; more strategies in a margin account.
- Simple app, good for learning to read a chain.
- US-listed options only. Trading from a CAD account costs a 1.5% currency conversion each way, so a USD account is worth it once you're active.
tastytrade- Built for options traders, with one of the best options chains around.
- $1 per contract to open, $0 to close, capped at $10 per leg (USD).
- Shows expected move and probability right on the chain.
- Free education through tastylive.
Fees as of September 2026; check the broker's site for current pricing.
Before your first trade
- Start with one contract. One. Scale with experience, not with account size.
- Mind the account type. In Canada, frequent option trading in a TFSA can get your gains taxed as business income. Check with an accountant.
Where to go next
Once this makes sense, read Failure Model: the 7-layer framework I use to pick what to sell, where, how much, and when to cut.
Failure ModelIntermediate · free PDF · 11 pages Questions first? Read the FAQ →