First Trade Walkthrough
Step-by-step guide to placing your first options trade
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Let's walk through a real trade. No theory — just the steps you'd follow on any brokerage platform.
The Situation
Stock XYZ is at $100. You think it's going to $108 in the next 2-3 weeks. You have $500 to risk.
Step 1: Pick Your Expiration
Your expected move is 2-3 weeks. Buy an option with 40-45 days to expiration. Always give yourself more time than you think you need. This cushion reduces time decay pressure.
Step 2: Pick Your Strike
Open the option chain for that expiration. Look at three calls:
- $95 call: $7.20 (too expensive for your budget — $720 per contract)
- $100 call: $3.50 (fits budget — $350 per contract)
- $105 call: $1.40 (cheap — $140 per contract, but needs $105+ to have value)
The $100 call at $3.50 gives you a good balance. One contract costs $350, within your $500 budget. Breakeven at expiration: $103.50.
Step 3: Check Liquidity
Look at volume and open interest on the $100 call. You want to see at least a few hundred in OI and some daily volume. Check the bid-ask spread — ideally under $0.10-$0.15.
Bid: $3.40 / Ask: $3.60. Spread is $0.20. Acceptable.
Step 4: Place the Order
In your broker:
- Action: Buy to Open
- Contract: XYZ $100 Call, [expiration date]
- Quantity: 1
- Order type: Limit
- Price: $3.50 (the mid price between $3.40 and $3.60)
Submit. If it doesn't fill in a minute or two, nudge to $3.55.
Step 5: Set Your Rules
Before you do anything else, decide:
- Profit target: Sell when the option hits $5.25 (50% gain) or when the stock hits $108
- Stop loss: Sell if the option drops to $1.75 (50% loss)
- Time stop: If nothing has happened in 2 weeks, re-evaluate
Write this down. Tape it to your monitor if you have to.
Step 6: Manage and Exit
Check the position once or twice a day. When one of your rules triggers, execute it.
The stock hits $106 after 10 days. Your option is worth about $7.50. That's a $400 profit on $350 risk. You place a Sell to Close limit order at $7.50 and you're done.
Total profit: $400. Time in trade: 10 days. Risk was defined at $350 from the start.
That's it. That's a complete options trade.