Investing in options can be an exciting way to potentially amplify your returns or hedge existing positions, but it's crucial to approach it with a solid understanding of the risks involved. If you're considering buying options with Charles Schwab, you're in good hands – they offer robust platforms, extensive educational resources, and dedicated support.
Ready to dive in? Let's walk through the process step-by-step!
Navigating the World of Options: Your Step-by-Step Guide to Buying Options on Charles Schwab
Before you place your first options trade, it's essential to understand that options are complex financial instruments. They can offer significant leverage, meaning small price movements in the underlying asset can lead to large percentage gains or losses in the option's value. Always ensure you understand the potential risks and rewards before trading.
Step 1: Are You Ready for Options Trading? Let's Find Out!
The very first thing you need to do is ensure you have a Charles Schwab brokerage account. If you don't, you'll need to open one. This is typically a straightforward process that can be done online.
Once you have an account, the next, and arguably most important, hurdle is options approval. Charles Schwab, like all reputable brokers, requires you to apply for and receive approval to trade options. This isn't just a formality; it's a regulatory requirement designed to ensure investors understand the risks.
How to Apply for Options Approval:
- Log in to your Charles Schwab account.
- Navigate to your Profile or Account Settings.
- Look for a section related to Margin & Options or Trading Privileges.
- You'll find an application there. This application will ask questions about your:
- Financial situation (income, net worth)
- Investment experience
- Risk tolerance
- Understanding of options trading
Understanding Options Approval Levels:
Charles Schwab has different options approval levels, each allowing you to engage in increasingly complex strategies. Here's a general overview:
- Level 0: Typically allows for Covered Calls and Covered Puts. These are often considered less risky as they involve owning the underlying stock.
- Level 1: Expands on Level 0 to include Long Calls, Long Puts, Long Straddles, Long Combinations, Long Strangles, and Cash-Secured Equity Puts (CSEP). This is where you start with basic directional bets.
- Level 2: Includes all of Level 1 plus Spreads, Diagonal Call Spreads, Diagonal Put Spreads, and Ratio Spreads (long side heavy). These involve multiple option legs to create specific risk/reward profiles.
- Level 3: The highest level, allowing for Uncovered Calls, Uncovered Puts, Uncovered Roll-outs, Short Straddles, Short Combinations, Short Strangles, and Uncovered Ratio Spreads. These strategies carry the highest risk, with potentially unlimited losses.
The approval process usually takes 5-10 business days. Schwab will evaluate your application and notify you of your approved trading level. Be honest and thorough in your application, as it directly impacts what you'll be able to trade.
Step 2: Educate Yourself – Knowledge is Power (and Profit!)
While you're waiting for your options approval, or even if you're already approved, dedicate time to options education. Charles Schwab offers a wealth of resources that are incredibly valuable for both beginners and experienced traders.
Key Educational Resources on Charles Schwab:
- Options Education Center: This is your go-to hub for articles, videos, and tutorials covering everything from the basics of calls and puts to advanced strategies and options "Greeks."
- Schwab Coaching: Participate in their daily webcasts, live and on-demand, where specialists discuss market conditions and demonstrate trading principles using Schwab's platforms.
- Today's Options Market Update: Stay informed with timely updates and outlooks from Schwab's options trading specialists.
- Paper Trading (thinkorswim paperMoney): This is critically important for new options traders. The thinkorswim platform (which Schwab acquired from TD Ameritrade) includes "paperMoney," a virtual trading environment where you can practice options trading with hypothetical funds using live market data. This allows you to test strategies and get comfortable with the platform without risking real capital.
Concepts to Master Before Trading:
- Calls and Puts: Understand what each contract represents (right to buy/sell) and how their value changes with the underlying asset's price.
- Strike Price: The price at which the underlying asset can be bought or sold.
- Expiration Date: The date on which the option contract
expires. - Premium: The price you pay (or receive) for an option contract.
- In-the-Money (ITM), At-the-Money (ATM), Out-of-the-Money (OTM): These terms describe the relationship between the strike price and the current market price of the underlying asset.
- Options "Greeks" (Delta, Gamma, Theta, Vega, Rho): These are measures of an option's sensitivity to various factors. While complex, a basic understanding can help you evaluate risk and potential profit.
Step 3: Choose Your Trading Platform
Charles Schwab offers several platforms to place your options trades, each with its own strengths:
- Schwab.com (Web Platform): Ideal for casual traders or those just getting started. It's intuitive and provides access to basic options trading tools.
- Schwab Mobile App: For on-the-go trading. The mobile app is designed to make placing options trades intuitive, populating relevant data as you build your order.
- thinkorswim® Desktop: Highly recommended for serious options traders. This professional-grade platform offers advanced charting, analytical tools, simulated trading (paperMoney), and in-platform live chat with options specialists.
- thinkorswim® Web: A web-based version of the thinkorswim platform, offering many of its powerful features without needing a desktop download.
- thinkorswim® Mobile App: A robust mobile app specifically designed for advanced trading, mirroring many features of the desktop version.
For options trading, especially as you progress, the thinkorswim platforms offer unparalleled tools and analysis capabilities.
Step 4: Funding Your Account
Before you can buy any options, you need funds in your Charles Schwab account.
- Electronic Funds Transfer (EFT): Connect your bank account for convenient transfers.
- Wire Transfer: For larger or quicker transfers.
- Check Deposit: Deposit checks directly.
Be aware of any holding periods for deposited funds, especially for new accounts. Electronic deposits are generally available for same-day trading, but some funds may have a holding period of up to five business days.
Step 5: Placing Your Options Trade (A Step-by-Step Walkthrough)
This is where the rubber meets the road! Let's assume you've identified an underlying stock (e.g., Apple, symbol AAPL) and have a strategy in mind.
Using Schwab.com (General Process):
- Log in to your Charles Schwab account.
- Navigate to the Trade section.
- Select Options.
- Enter the symbol of the underlying security (e.g., AAPL).
- Select your Strategy: From the dropdown menu, choose the type of option you want to trade (e.g., "Options Call" for a single long call, or a multi-leg strategy like "Vertical Spread").
- View the Option Chain: A menu will appear displaying the options chain for the selected stock. This shows various expiration dates, strike prices, and the corresponding call and put options with their bid/ask prices.
- Select Your Desired Contract:
- Choose an Expiration Date: How long do you want the option to be valid?
- Select a Strike Price: This is the price at which the option can be exercised.
- Identify the Call or Put: Based on your market outlook (bullish for calls, bearish for puts).
- Click on the "Bid" or "Ask" price of the specific contract you wish to trade. Clicking the "Ask" price typically initiates a "Buy to Open" order for a call, and the "Bid" price initiates a "Sell to Open" order for a call (or vice-versa for puts).
- Fill out the Order Form (Trade Ticket):
- Action:
- Buy to Open: To initiate a new long options position.
- Sell to Open: To initiate a new short options position (requires higher approval levels).
- Buy to Close: To close an existing short options position.
- Sell to Close: To close an existing long options position.
- Quantity: The number of option contracts you want to trade. Remember, one options contract typically represents 100 shares of the underlying stock.
- Order Type:
- Market Order: Executes immediately at the best available price. Beware: Price can fluctuate rapidly.
- Limit Order: You specify the maximum price you're willing to pay (for buying) or the minimum price you're willing to receive (for selling). This guarantees your price but not execution.
- Other types include Stop, Stop Limit, Trailing Stop, etc., for more advanced control.
- Limit Price (if applicable): If you choose a limit order, enter your desired price.
- Timing (Time-in-Force):
- Day: The order is canceled at the end of the trading day if not executed.
- GTC (Good 'Til Canceled): The order remains active for 60 calendar days unless filled or canceled by you.
- Other options like FOK (Fill or Kill) or IOC (Immediate or Cancel) might be available.
- Action:
- Review Order: Always review all the details carefully before submitting. Check the symbol, action, quantity, strike, expiration, order type, and estimated cost.
- Place Order: Confirm and submit your trade.
Using thinkorswim Desktop (Brief Overview - More Advanced):
- Launch thinkorswim Desktop.
- Go to the Trade tab.
- Enter the symbol of the underlying asset.
- The Option Chain will appear.
- Right-click on the bid or ask price of the desired option contract.
- Select Buy Custom or Sell Custom to build single or multi-leg strategies.
- The Order Entry window will populate.
- Adjust quantity, order type, price, and time-in-force.
- Review and Send Order.
The thinkorswim platform offers highly visual tools, like risk graphs, to help you analyze potential outcomes before placing your trade.
Step 6: Monitor Your Trade
Once your order is placed and filled, it's crucial to monitor your options position. Options are time-decaying assets, meaning their value erodes as they approach expiration.
- Keep an eye on the underlying stock's price.
- Track the premium of your options contract.
- Be aware of the expiration date.
- Understand your break-even point.
Options can expire worthless, meaning you lose the entire premium paid if the underlying asset doesn't move in your favor sufficiently by expiration.
Step 7: Manage Your Position (Closing or Rolling)
As your options trade progresses, you'll need to decide how to manage it.
- Close the Position: If your trade is profitable or you want to limit losses, you can buy to close a short option or sell to close a long option. This is typically done through the same trade ticket process, but with the opposite "Action" selected.
- Let it Expire: If the option is out-of-the-money at expiration, it will expire worthless, and you will lose the premium paid (for long options).
- Exercise/Assignment: If you hold a long call and it's in-the-money at expiration, you may choose to exercise it and buy the underlying shares. If you've sold an options contract and it's in-the-money, you might be assigned, meaning you're obligated to buy or sell the underlying shares.
- Roll the Option: This involves closing your current option position and opening a new one with a different strike price or expiration date. Traders often "roll" options to extend the time horizon or adjust their strike price as market conditions change.
Options Trading Fees at Charles Schwab
Charles Schwab offers competitive pricing for options trading:
- Online Options Trades: $0 base commission, plus $0.65 per contract fee.
- Automated Phone: $5, plus $0.65 per-contract fee.
- Broker-Assisted: $25, plus $0.65 per-contract fee.
Note: Per-contract fees are
Conclusion
Buying options on Charles Schwab involves a clear process, from getting approved and educating yourself to choosing the right platform and executing your trade. Remember, options trading carries inherent risks, and it's vital to continually educate yourself and understand the potential outcomes of your strategies. With Charles Schwab's comprehensive tools, educational resources, and supportive environment, you have a strong foundation to explore the world of options. Happy trading!
10 Related FAQ Questions
How to get approved for options trading at Charles Schwab?
To get approved, log in to your Schwab account, navigate to "Profile" or "Account Settings," and find the "Margin & Options" section to complete the options trading application. The application will ask about your financial situation, investment experience, and risk tolerance.
How to check your options approval level at Charles Schwab?
After applying, you can typically check your options approval level by logging into your Schwab account and viewing your account details or by revisiting the "Margin & Options" section within your profile. Schwab will also send you a confirmation.
How long does it take to get approved for options trading at Charles Schwab?
The options approval process at Charles Schwab typically takes 5-10 business days.
How to fund your Charles Schwab account for options trading?
You can fund your account through Electronic Funds Transfer (EFT) by linking your bank account, initiating a wire transfer, or depositing a check. Be mindful of any holding periods for newly deposited funds.
How to place an options trade on Charles Schwab's website (Schwab.com)?
Log in to Schwab.com, go to the "Trade" section, select "Options," enter the underlying symbol, choose your strategy, select the desired option contract from the chain, fill out the order ticket (action, quantity, order type, price, timing), review, and then place your order.
How to trade options on the Charles Schwab mobile app?
Open the Schwab Mobile app, navigate to "Trade," then select "Options." Look up the underlying security, select your strategy (e.g., Call), choose the desired option contract, fill in the order details (action, quantity, order type, price, timing), review, and tap "Place Order."
How to use thinkorswim for options trading on Charles Schwab?
Download and log in to the thinkorswim desktop platform. Go to the "Trade" tab, enter the underlying symbol, view the option chain, right-click on a bid/ask price to build your order, and utilize the advanced tools like risk graphs before sending your order.
How to practice options trading without real money on Charles Schwab?
Charles Schwab provides a simulated trading environment called paperMoney® within its thinkorswim platforms. This allows you to practice options trading with hypothetical funds and live market data without any financial risk.
How to understand options fees at Charles Schwab?
For online options trades, Charles Schwab charges a $0 base commission plus $0.65 per contract fee. Be aware that automated phone and broker-assisted trades have higher base fees.
How to learn more about options trading strategies with Charles Schwab?
Charles Schwab offers extensive educational resources, including an "Options Education" section with articles and videos, "Schwab Coaching" webcasts, and daily "Options Market Updates" from their specialists, all accessible through their website.
