This guide will walk you through the process of trading options on Charles Schwab's platforms. Options trading can be complex and carries significant risks, so it's crucial to understand the fundamentals before you begin.
Trading Options on Charles Schwab: A Comprehensive Guide
Are you ready to explore the exciting, yet challenging, world of options trading on Charles Schwab? If you've been curious about leveraging your investments, generating income, or hedging your portfolio, you're in the right place! Charles Schwab offers a robust suite of tools and educational resources to help you navigate this advanced trading strategy.
Step 1: Are You Ready for Options? Understanding the Basics and Risks
Before we even think about opening a trade ticket, let's address the most fundamental question: Are options right for you? Options contracts are derivative financial instruments, meaning their value is derived from an underlying asset like a stock or an ETF. They offer leverage, which can amplify both gains and losses, making them inherently riskier than simply buying and selling stocks.
Sub-heading: What are Options?
In essence, an options contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price
- Call Option: Gives you the right to buy the underlying asset. You typically buy calls if you expect the price of the underlying asset to go up.
- Put Option: Gives you the right to sell the underlying asset. You typically buy puts if you expect the price of the underlying asset to go down.
Sub-heading: The Risks Involved
It's vital to grasp that options trading carries a high level of risk and is not suitable for all investors. While buying options means your maximum loss is typically limited to the premium you pay, selling options (especially "uncovered" options) can expose you to potentially unlimited losses.
Consider these points:
- Leverage: A small move in the underlying asset's price can lead to a much larger percentage gain or loss in the options contract.
- Time Decay (Theta): Options lose value as they approach their expiration date, all else being equal. This is a constant drain on the option's value.
- Volatility (Vega): Changes in the underlying asset's volatility can significantly impact options prices.
- Complexity: Options strategies can range from simple (buying a single call or put) to highly complex (multi-leg spreads).
Please ensure you have thoroughly read and understood the Options Disclosure Document titled "Characteristics and Risks of Standardized Options" before proceeding. This document is mandated by regulators and is your essential guide to the inherent risks.
Step 2: Open and Qualify Your Charles Schwab Account for Options Trading
If you don't already have one, your first step is to open a Charles Schwab brokerage account. Once your account is established, you'll need to apply for options trading approval. Schwab has different "options approval levels" that determine the types of strategies you're allowed to execute, based on your financial situation, trading experience, and risk tolerance.
Sub-heading: Opening a Brokerage Account
- Online Application: Visit the Charles Schwab website and follow the prompts to open a new brokerage account. You'll need to provide personal information, employment details, and financial data.
- Funding: Fund your account. Schwab typically doesn't require a minimum balance to open an account, but you'll need sufficient funds to place options trades.
Sub-heading: Applying for Options Approval
- Log In: Log in to your Charles Schwab account on Schwab.com.
- Navigate to "Profile": Look for a "Profile" or "Service" section.
- Find "Margin & Options": Within the profile settings, you should find a link related to "Margin & Options" or "Trading Privileges."
- Select Account: If you have multiple accounts, select the specific account for which you want to enable options trading.
- Choose Options Level: Schwab offers various options approval levels:
- Level 0 (Covered): Allows covered calls, covered puts, and unwinds. Generally considered the least risky.
- Level 1 (Long): Includes all of Level 0, plus buying long calls, long puts, long straddles, long combinations, and cash-secured equity puts (CSEP).
- Level 2 (Spreads): Includes all of Level 1, plus various spread strategies like vertical spreads, diagonal spreads, and ratio spreads (long side heavy). Often requires a margin account.
- Level 3 (Uncovered/Short): Includes all of Level 2, plus selling uncovered calls, uncovered puts, short straddles, short combinations, and uncovered ratio spreads. This level carries the highest risk.
- Note: Certain account types, like IRAs, may have restrictions on higher-risk strategies (e.g., Level 3).
- Complete Application: You'll be asked to provide detailed financial information, your investment experience, and your trading objectives. Be honest and accurate as this information directly impacts your approval level.
- Review and Submit: Carefully review all the information before submitting your application.
- Approval Time: Approval can take a few business days. You'll typically receive an email notification about the status of your request.
Step 3: Choose Your Trading Platform
Charles Schwab offers several platforms to trade options, catering to different levels of experience and trading needs.
Sub-heading: Schwab.com (Web Platform)
- Best for: Beginners, casual options traders, and those who prefer a straightforward interface for basic options strategies.
- Features: Intuitive options chains, easy order entry, and fundamental research tools.
Sub-heading: thinkorswim® (Desktop, Web, and Mobile)
- Best for: Experienced options traders, active traders, and those who require advanced analytical tools, charting, and complex strategy capabilities.
- Features:
- thinkorswim Desktop: The flagship platform with highly customizable workspaces, advanced charting, complex option strategy builders, risk analysis tools (like "What If" scenarios), and powerful screeners.
- thinkorswim Web: A web-based version that offers many of the desktop platform's key features, accessible from any browser.
- thinkorswim Mobile App: A robust mobile app that allows you to trade on the go with many of the advanced features found on the desktop platform.
Tip: If you're new to options, consider starting with Schwab.com for simpler trades, and then exploring thinkorswim's paperMoney® (simulated trading) feature to practice more advanced strategies without risking real capital.
Step 4: Research and Identify Options Trade Ideas
Once your account is set up and approved, it's time to find potential trades. This involves researching underlying assets and analyzing specific options contracts.
Sub-heading: Utilizing Schwab's Research Tools
- Schwab.com:
- Quotes & Research: Search for a stock symbol. On the stock's detail page, you'll find an "Options" tab.
- Options Chain: This displays available call and put contracts for various strike prices and expiration dates. You'll see bid/ask prices, volume, open interest, and implied volatility. Shaded areas often indicate "in-the-money" options.
- Argus Options Reports: Schwab provides access to these reports for covered call and diagonal spread strategies on a selection of stocks.
- thinkorswim:
- Trade Tab: The heart of options trading on thinkorswim. Here, you can pull up options chains, analyze individual options, and build multi-leg strategies.
- Analyze Tab: Offers powerful tools like risk/reward graphs, probability analysis, and "what-if" scenarios to simulate potential profit and loss under different market conditions.
- Scan Tab: Use the options screener to find opportunities based on criteria like implied volatility, volume, and specific strategies.
- Sizzle Index™: A unique thinkorswim tool that indicates if current options activity for a stock is unusually high or low compared to its average.
Sub-heading: Key Factors to Consider
- Underlying Asset: Research the company or ETF. Do you have a bullish, bearish, or neutral outlook?
- Expiration Date: How long do you expect your thesis to play out? Shorter-term options are more sensitive to time decay.
- Strike Price: The price at which the option can be exercised. This is crucial for determining whether an option is in-the-money, at-the-money, or out-of-the-money.
- Implied Volatility (IV): A measure of the market's expectation of future price swings. High IV generally means higher option premiums.
- Open Interest & Volume: Indicate liquidity. Higher numbers generally mean it's easier to enter and exit trades.
- Options Strategy: Based on your outlook and risk tolerance, choose an appropriate strategy (e.g., buying a call for bullish outlook, selling a covered call for income).
Step 5: Placing Your Options Trade
Once you've identified a specific option or strategy, it's time to place your order. The process will vary slightly depending on the platform you're using.
Sub-heading: On Schwab.com
- Navigate to the Options Chain: Search for your desired underlying stock/ETF and go to its "Options" tab.
- Select Expiration and Contract: Choose the expiration month/week and then click on the bid price for a put or the ask price for a call to initiate a "Buy to Open" order, or vice-versa for "Sell to Open."
- Options Trade Builder: Schwab.com has an "Options Trade Builder" which simplifies multi-leg strategies. You can select a strategy from a menu, and it will help you populate the order.
- Order Ticket: A trade ticket will appear.
- Action: Buy to Open, Sell to Open, Buy to Close, Sell to Close.
- Quantity: Number of contracts (each contract typically represents 100 shares).
- Order Type:
- Market Order: Executes immediately at the best available price (can be risky with options).
- Limit Order: Executes at your specified price or better. Highly recommended for options.
- Stop Order: Triggers a market order when a certain price is reached.
- Stop Limit Order: Triggers a limit order when a certain price is reached.
- Time in Force: Day (expires at end of day), GTC (Good 'Til Canceled), etc.
- Review and Confirm: Always carefully review your order details before submitting. Check the symbol, strike, expiration, quantity, and price.
Sub-heading: On thinkorswim
thinkorswim offers a more advanced order entry system, particularly useful for complex strategies.
- Go to the "Trade" Tab: Enter the symbol of your underlying asset.
- View Options Chain: The options chain will populate.
- Click on Bid/Ask:
- To buy a call, click on the "Ask" price for the desired strike and expiration.
- To buy a put, click on the "Ask" price for the desired strike and expiration.
- To sell a call, click on the "Bid" price for the desired strike and expiration.
- To sell a put, click on the "Bid" price for the desired strike and expiration.
- Create Custom Strategy (for multi-leg): You can drag and drop multiple legs into the order entry panel at the bottom of the screen to build spreads, straddles, etc. thinkorswim automatically recognizes the strategy you're building.
- Adjust Order Details: Similar to Schwab.com, you'll specify quantity, order type (Limit, Market, etc.), and time in force.
- Risk Analysis: Before placing, leverage the "Analyze" tab to visualize your potential profit and loss scenarios.
- Confirm and Send: Review your order carefully and then confirm and send it.
Step 6: Managing Your Options Position
Once your order is executed, monitoring and managing your position is critical.
Sub-heading: Monitoring Your Trades
- Positions Tab: On both Schwab.com and thinkorswim, you'll find a "Positions" or "Account" tab where you can view your open options trades, their current value, profit/loss, and other relevant metrics.
- Alerts: Set up price alerts to be notified when the underlying asset or the option contract reaches a certain price.
- Watchlists: Keep track of the underlying assets you're trading.
Sub-heading: Exiting Your Trade
- Buy to Close/Sell to Close: To close an existing option position, you'll place an opposite order. If you bought an option, you'll need to "Sell to Close" it. If you sold an option, you'll need to "Buy to Close" it.
- Exercise or Assignment:
- Exercise: If you bought an in-the-money option and want to take ownership (for calls) or sell shares (for puts), you can exercise the option. This means you'll buy or sell the underlying shares at the strike price.
- Assignment: If you sold an option, and it's in-the-money at expiration, you may be assigned. This means you'll be obligated to buy (for puts) or sell (for calls) the underlying shares at the strike price.
- Expiration: If you don't close or exercise an option before expiration, it will expire worthless if out-of-the-money, or be automatically exercised/assigned if in-the-money (unless you provide instructions otherwise).
Sub-heading: Rolling Your Position
Sometimes, traders choose to "roll" an options position. This involves closing an existing contract and opening a new one with a different strike price, expiration date, or both. This can be used to extend the trade, adjust risk, or capture more premium.
Step 7: Continuous Learning and Risk Management
Options trading is a continuous learning process. The market is dynamic, and strategies that work in one environment might not in another.
Sub-heading: Utilize Schwab's Educational Resources
Charles Schwab provides extensive educational materials:
- Articles and Videos: A vast library covering everything from options basics to advanced strategies, risk management, and the "Greeks."
- Schwab Coaching™: Live and on-demand webcasts with trading professionals who demonstrate strategies and discuss market conditions.
- PaperMoney®: A simulated trading platform within thinkorswim where you can practice strategies with virtual money without real risk.
- In-Platform Live Chat/Support: Schwab offers live chat and phone support with options specialists.
Sub-heading: Implement Strong Risk Management
- Define Your Risk: Before entering any trade, know your maximum potential loss.
- Position Sizing: Don't put too much of your capital into a single trade.
- Stop-Loss Orders: Consider using stop-loss orders on the underlying asset or the option contract itself, though these aren't always guaranteed to execute at your desired price in volatile markets.
- Diversification: Don't put all your eggs in one basket.
- Review and Adapt: Regularly review your trades, learn from your successes and failures, and adapt your strategies as needed.
10 Related FAQ Questions
How to get approved for options trading on Charles Schwab?
You can apply for options approval online through your Charles Schwab account by navigating to the "Profile" or "Service" section and then "Margin & Options," where you'll fill out an application about your financial situation and trading experience.
How to increase my options trading level on Charles Schwab?
To increase your options trading level, you'll need to submit a new options application, typically through the same "Margin & Options" section of your online account, indicating the higher level you wish to achieve. Approval depends on your financial profile and trading experience.
How to find options chains on Schwab.com?
Log in to Schwab.com, search for the symbol of the underlying stock or ETF, and then click on the "Options" tab on the quote page to view the options chain.
How to place a multi-leg options trade on thinkorswim?
On the thinkorswim "Trade" tab, you can drag and drop multiple options contracts from the options chain into the order entry panel at the bottom, and the platform will automatically identify the multi-leg strategy you are building.
How to use paperMoney® to practice options trading on Charles Schwab?
PaperMoney® is a simulated trading account available within the thinkorswim platform (desktop, web, and mobile). You can access it by logging into thinkorswim and selecting the paperMoney® option, allowing you to trade with virtual funds.
How to understand options implied volatility on Schwab's platforms?
Implied volatility (IV) is displayed on options chains on both Schwab.com and thinkorswim. On thinkorswim, you'll find more advanced tools and indicators related to IV, such as IV Percentile and IV Rank, to help you assess if current volatility is high or low relative to its historical range.
How to calculate the maximum loss for an options trade on Charles Schwab?
For a bought option (long call or long put), the maximum loss is typically the premium paid for the option contract(s). For sold options or complex strategies, you can use the "Analyze" tab on thinkorswim to visualize the maximum potential loss through risk/reward graphs.
How to close an open options position on Charles Schwab?
To close an open options position, you must place an opposing order to your original trade. If you initially "Bought to Open," you'll "Sell to Close." If you "Sold to Open," you'll "Buy to Close." This can be done through the trade ticket on Schwab.com or thinkorswim.
How to access options education and coaching on Charles Schwab?
Charles Schwab offers extensive options education through its "Learn" section on Schwab.com, which includes articles, videos, and interactive courses. You can also access live and on-demand "Schwab Coaching™" webcasts for practical trading insights.
How to contact Charles Schwab for options trading support?
You can contact Charles Schwab's options specialists via live chat on their platforms or by calling their dedicated trading support line (typically available Monday-Friday during market hours). Their contact information is usually found in the "Support" or "Contact Us" sections of their website or platforms.
