Options, also known as Options in English, are a financial trading method used to trade financial investment categories derived from futures trading. Options give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price at a certain time in the future. The underlying assets here can be stocks, commodities, currencies or indices, etc. The person who buys the option pays a fee, which is called the option premium. The size of the option premium depends on a variety of factors, including the option exercise price, option expiration time, and the volatility of the underlying asset. Futu moomoo provides 11 options strategies and customized strategies, including call/put, covered call/put, collar, straddle, triangle, etc. If you plan to engage in options trading, you can consider opening a Futu moomoo account first, and you can get multiple US stocks for free. Options have the characteristics of two-way trading, are more flexible than stock trading, and have the characteristics of unequal profits and losses. At the same time, they are safer than futures trading, and a variety of strategies can be used in combination. This makes investment and financial management no longer a single linear profit and loss, but full of more variables and interest. Want to get started with options trading? First, you need to understand what options trading is. Options trading is widely used for speculation and risk management. Speculators can profit by buying or selling options, while risk managers can protect their portfolios from unexpected price movements through options trading. Options trading is also highly flexible, and investors can engage in many different types of options trading strategies depending on market conditions. Let’s use a simple example to explain: “Bill wants to buy a car from Zoe” Zoe owns a car, and Bill proposes to Zoe that within the next one month, he can obtain the right to purchase the car for $15,000. Zoe agreed to the deal and required Bill to pay 2% first, which is $300 (option fee), and she would fulfill her obligation not to sell the car within the next month. At the same time, when Bill made a purchase request, she would sell the car to him as previously agreed without additional conditions. This process is the basic process of options contracts, where: The commitment reached between Zoe and Bill is an "option contract" (Option); Zoe is the seller, also known as the “Originator”, “Option Writer”, or “Option Seller”; Bill is the buyer, also known as "Option Holder", or "Option Buyer"; Bill has obtained the right to purchase Zoe's car, which is the "Recipient the right". The option contract that obtains the right to purchase is called "Call Option"; One month is the option period, which is a known pre-defined time frame, or Option’s Term, Option’s Duration; The car is the “subject matter” of this option contract, that is, “a known asset”; $15,000 is the "proposed price" of this contract, which is Strike in English, which is "a known price"; $300 is the fee paid by both parties for mutual trust when the two parties reach this contract, which is the cost of this option contract. It is called the "option fee", which in English is the price of the Option; As can be seen from this example, an option is a contract that gives the buyer the right but does not impose any obligations. It allows the buyer to exercise the right to sell or buy a specific underlying asset at a proposed price within a certain period in the future. When the subject matter of an option contract is a certain stock, that is, the two parties agree that before a certain time in the future, the buyer has the right to buy the stock held by the seller or sell the stock held by the buyer at a certain price from the seller, this contract is a "stock option contract." Similarly, when the subject matter is an ETF, the transaction is an "ETF options transaction."
Regarding the option period, the US market stipulates that the buyer can exercise the power at any time before the expiration date; while the EU market stipulates that the buyer can exercise the power only on the expiration date. Options contracts are a very practical financial tool and meet the needs of a variety of trading models, the most important of which are call options and put options. What is a call option? Call options, in English, are Call Options. A call option refers to the buyer's right to buy the underlying asset based on the proposed price and quantity within the validity period of the option contract. Usually the buyer believes that the value of the underlying asset will rise and earns the difference between the actual value and the proposed value on the exercise date. When you buy a call option, you gain the right to buy an asset at a specific price on or before a specific date. In the stock world, call options are also known as "call options" or "buy options." The contract means that the buyer believes that the price of the stock will rise in the future, so he signs a call option contract with the seller. During the validity period of the contract, when the stock does rise and the price exceeds the proposed price of the contract, the buyer can exercise the purchase right and buy the stock at the proposed price. If the stock is sold after buying, the buyer will earn the difference between the actual price and the proposed price; When the stock price does not rise, or the increase does not exceed the total amount of the proposed price plus the option premium, if the buyer exercises the option contract, he may suffer a certain loss. At this time, the buyer can choose not to exercise the purchase right. At this time, the buyer's maximum loss is the option premium paid previously. Here is an example of a call option: Assume that the current market price of Company ABC's stock is $100 per share. You believe that ABC Company's stock price will increase in the future, so you purchase a call option with an expiration date of 3 months in the future and an exercise price of $110. You paid $5 for the option. If ABC Company's stock price rises to $120 or above within the next 3 months, you can exercise your option and purchase ABC Company stock at $110. That means you'll earn $10 per share (after actually deducting the option premium you paid). Conversely, if ABC Company's stock price does not rise to $110 or above within the next 3 months, you will not exercise your option and you will only lose the $5 option fee you paid. What is a put option? Put options, English is Put Options. A put option means that the option buyer has the right to sell a certain amount of the underlying object at a proposed price within the validity period of the option contract. During the price setting process, the buyer often believes that the value of the underlying object will fall, and earns the difference between the proposed price and the actual price on the exercise date. When you buy a put option, you gain the right to sell an asset at a specific price on or before a specific date. It generally means that you predict that a certain stock will fall in the future, so you hold the stock and sign a put option with the seller. In the stock world, put options are also known as "put options" or "put options." During the validity period of the contract, if the stock price falls and falls below the proposed price, the buyer can exercise the right to sell, and the seller must buy the stock at the proposed price. At this time, the buyer can earn the difference between the proposed price and the actual price of the stock. Of course, if the stock does not fall, or the falling price does not fall below the proposed price, then the put option has no meaning in fulfilling the contract. Therefore, the house buyer will choose not to exercise the option contract, thereby only losing the option premium. Here is an example of a put option: Assume that XYZ Company's stock currently has a market price of $50 per share. You believe that the stock price of Company XYZ will fall in the future, so you purchase a put option with an expiration date of 3 months in the future and a strike price of $40. You paid $3 for the option.
If XYZ Company's stock price falls to $30 or less within the next 3 months, you can exercise your option and sell XYZ Company stock for $40. That means you'll earn $10 per share (after actually deducting the option premium you paid). Conversely, if the stock price of Company XYZ does not fall to $40 or less within the next 3 months, you will not exercise your option and you will only lose the $3 option fee you paid. What are the characteristics of options? 1. Two-way transactions In traditional trading, investors are only buyers and can only hope to earn profit from the price difference if the price rises. Once the price falls, they can only admit losses. In options trading, investors can make profits by investing as buyers or sellers based on the rise or fall in the value of the underlying asset. Therefore, when the stock price falls, they can also make profits through options trading. For example, if you predict that a certain stock is about to fall, traditional investors will either sell to stop the loss, or continue to hold and wait for a rebound one day. Options trading allows investors to buy put options or sell call options, which means they can also make profits during the decline of stocks. The two-way trading model gives investors more strategic choices. 2. Unilateral power Options trading gives the buyer the right to exercise. When trading options, the buyer can choose to exercise or not exercise the option based on the market conditions of the underlying asset of the futures contract. When the buyer proposes to exercise the right during the contract period, the seller has the obligation to fulfill the option contract. 3. Unequal profits and losses Because the power to exercise options trading is in the hands of the buyer, the buyer will only exercise the buying or selling behavior of the futures contract when it is beneficial to him or her. If it is beneficial to the buyer, the profit is usually unlimited; If the price is unfavorable, the loss will not exceed the option premium. Compared with futures trading, the buyer's loss in option trading is greatly reduced, which is generally the loss of the option premium. For the seller of an option contract, the most profit is the option premium of the option contract, but the loss will be determined according to the content of the futures contract, and in most cases the loss may be unlimited. This characteristic of incorrect profits and losses gives options trading unique advantages in risk management. How are options contracts valued? The valuation of options contracts can essentially be considered as a probabilistic prediction of the future price changes of the underlying asset. 1. Probability When the probability of the predicted situation occurring is high, the valuation of the option contract will naturally increase. For example, the value of the call option will rise as the underlying stock rises. In this way, the value of the option contract can also become a reference item for stock market judgment to a certain extent. 2. Length of time The value of an option contract that is approaching its expiration date will gradually decrease because the change time of the underlying value is limited and the room for change gradually decreases. The possibility of making profits through high price differences decreases. Therefore, the value of an option contract that expires in one year will be higher than that of an option contract that expires in one month. 3. Fluctuation range Large fluctuations are what investors are willing to see but are afraid of seeing. Large fluctuations in a favorable direction mean an increase in profits, and vice versa means an increase in losses. For buyers of option contracts, due to the existence of a two-way trading model, large fluctuations mean the expansion of profit margins. Therefore, option contracts with greater fluctuations have greater value. How to play options? What are the options trading strategies? Below are some common options trading strategies, the most commonly used by investors are call options and put options. Buying a call option (Long call): Believing that the stock price will rise, buying a call option to gain income when the price rises. Buying a put option (Long put): Believing that the stock price will fall, buying a put option to gain income if the price falls. Short call: Holding a stock and expecting the price to remain stable or rise slightly, selling the call option to earn option fees. Short put: Looking to buy a stock and expecting the price to remain stable or rise slightly, sell the put to earn the option premium and buy the stock at the strike price when the option expires.
Insurance strategy (Protective put): Holding a stock and fearing a price drop, buying put options to protect your investment. Iron butterfly strategy: Buying call options and put options at the same time, and selling two call and put options with the strike price slightly lower or slightly higher than the strike price in the expectation that the stock price will remain stable. Long straddle: Anticipating large fluctuations in stock prices, buying both call and put options to gain income if the price rises or falls. Due to the two-way trading model, options trading has a variety of trading strategies, which is more flexible and tests investors' ability to formulate strategies. You can start with the four basic strategies. 1. Buy a call option (Long Call) Buying call options is one of the most popular trading strategies. It gives the option holder the right, but not the obligation, to purchase the underlying asset at a specific price on or before the option expiration date. By purchasing call options, option holders believe that the price of an underlying asset (such as a stock, commodity, currency, etc.) will rise, thereby earning a profit if the price rises in the future. For example, let's say Company XYZ's stock currently trades at $100. You believe the company has good prospects and the stock price is likely to rise, so you purchase a call option with an expiration date three months in the future, a strike price of $110, and an option fee of $3. If the stock price of XYZ rises to $120 before the option expiration date, you can exercise your call option, buy XYZ stock for $110, and sell it for the current market price of $120, thereby earning $10 per share (minus the option fee you paid). If the stock price of XYZ does not rise to $110 or above before the option expiration date, you will not exercise your option and you will only lose the $3 option fee you paid. Therefore, buying a call option has a fixed loss and unlimited gain potential. Judgment basis: The market is bullish and you can earn profits from the increase in the price of the underlying security. Profit and loss situation: Maximum profit: no upper limit, derived from the stock price difference Maximum loss: option premium Break-even point: strike price + option premium Volatility range: An increase in the volatility range is positive, and a fall is negative. Time Reduction: Negative Effects 2. Buy a put option (Long Put) Buying put options is an ideal strategy for investors to profit from a drop in the price of the underlying stock. Investors can purchase this option contract to sell an underlying asset at a specific price at a certain time in the future. This option contract allows investors to earn income when the price of the underlying asset falls. As an example, suppose an investor believes that stock prices will fall and wants to protect his portfolio from losses. This investor can purchase a put option contract on a stock that provides for the sale of the stock at a specific price at a specific time in the future. Suppose the investor purchases a stock put option with a strike price of $100, expiration in three months, and pays a premium of $2. If the stock price falls to $90 within three months, the investor can exercise the option and sell the stock for $100, earning a $10 gain. Because the investor has paid a $2 premium, his net gain is $8. However, if the stock price is still above $100 after three months, the investor can choose not to exercise the option and the loss is limited to the $2 premium he paid. This strategy allows investors to gain when the stock price falls, while only losing at most the premium paid when the stock price rises or stays the same. Basis for judgment: If the market falls, you can earn profits from the fall in the price of the underlying security. Maximum profit: very large, but there is an upper limit, that is, the stock price drops to zero yuan Break-even point: Strike price - option premium 3. Selling call options (Short Call) The selling call strategy involves an investor selling a call option contract while holding an equal amount of shares of the underlying stock. It is suitable for those who are optimistic about the underlying stock but believe that the market may enter a slight fluctuation before the option expires.
It is the sale of an options contract that gives the option buyer the right to purchase the underlying asset at a specific price on or before the expiration date. The holder of a sold call option believes that the price of the underlying asset may fall or remain stable, hoping to receive the option premium while facing possible future losses. For example, let's say Company XYZ's stock currently trades at $100. You believe that the company's prospects are stable or declining and that the stock price will not rise above a certain price, so you sell a call option with an expiration date three months in the future, a strike price of $110, and an option fee of $3. If the stock price of XYZ does not rise to $110 or above before the option expiration date, the option buyer does not exercise the option and you receive the $3 option fee while maintaining a holding on XYZ stock. If the stock price of XYZ rises to $120 before the option expiration date, the option buyer will exercise the option and you will need to buy XYZ stock for $110 and sell it for the current market price of $120, thus facing a loss of $10 per share (minus the $3 option fee you received). Selling a call option has limited gain and unlimited loss potential because the price of the underlying asset may rise above the strike price before the option's expiration date, resulting in the holder needing to purchase the underlying asset at a higher price or facing a higher loss. Therefore, selling call options is a high-risk, high-reward options trading strategy that requires an in-depth understanding of the relevant knowledge and risks of options trading. Basis for judgment: Have a neutral or bullish attitude towards the underlying stock. Maximum profit: limited, option premium received + the difference between the execution price and the stock purchase price Maximum loss: The degree of loss corresponds to the degree of stock price decline Break-even point: stock purchase price - option premium received Volatility range: rising volatility is negative, falling volatility is positive Time reduction: positive impact 4. Selling a put option (Short Put) Selling a put option (Short Put) refers to an investor selling a contract that gives the buyer the right and the seller the obligation to buy the underlying asset at a specific price at a specific time in the future. The seller receives a premium and assumes the obligation to purchase the underlying asset at an agreed price within a specified time in the future. Here is an example to explain the principle of selling put options. Assume that the current market price of a company's stock is $100. An investor who expects that the stock price will remain stable or increase may choose to sell a put option, that is, sell a put option. The investor sells a put option with a strike price of $90 and receives a premium of $2. If the stock price is above $90 when the option expires, the buyer does not exercise the option and the seller gets to keep the $2 premium received. However, if the stock price is below $90 when the option expires, the buyer will exercise the option and the seller will need to purchase the stock at $90, even if the market price is below $90 at that time. In this case, the seller will face losses. For example, if the stock price drops to $80 when the option expires, the seller would need to buy the stock at $90 and then sell it in the market for $80, losing $10. In summary, selling put options is an investment strategy that allows investors to gain from a stock's price remaining stable or rising, but with the risk that if the stock price falls, they may need to purchase the stock at a higher price, thereby incurring a loss. Recommended broker platforms that can trade options As an investor, choosing a reliable and suitable trading platform is the most convenient and suitable choice for safe transactions. Moreover, mature trading platforms often provide more effective and accurate market analysis, which is also helpful for investors to decide investment strategies. Currently, the main online U.S. brokers include: Interactive Brokers, Futu, Moomoo, Robinhood, Firstrade, etc. Futu moomoo options trading moomoo Futu moomoo provides 11 options strategies and allows you to customize your own strategies. Here, you can enter complex multi-leg option strategies in one order and place two orders at the same time.
At the same time, Futu moomoo supports trailing stop loss. You can set a "Tracking Amount †" or † "Tracking Ratio" so that the system will continuously calculate the stop loss price as the market fluctuates. Plus, its P&L analysis is very insightful and easy to use, with just one click I can check break-even points, profit possibilities, etc. before placing an order. You can follow the steps below to choose different option strategies in Futu moomoo APP. The features of Futu moomoo options trading are summarized as follows: 11 option strategies and customized strategies: Moomoo offers 11 options strategy orders, including call/put, covered call/put, collar, straddle, triangle, butterfly, vertical, arbitrage, iron butterfly and iron arbitrage strategies. You can place two orders at the same time (within the same strategy). Moomoo offers a custom strategy that enables you to combine option orders with the underlying security however you wish. Trailing stop-limited orders: Moomoo supports trailing stop-loss orders for options trading. You can set a "Trail Amount †" or † "Trail Ratio" so that the system will continuously calculate the stop loss price as the market fluctuates. Insightful profit and loss analysis: You can view profit and loss analysis, including break-even point, profit possibility, etc., and analyze the potential profit range with one click before placing an order. Webull Options Trading Webull Webull is a large-scale financial trading online broker that provides desktop programs and mobile clients, as well as a series of practical tools, allowing investors to experience the convenience and smoothness of online trading. For options trading, Webull provides 0 commission, 0 contract fees, 0 transfer or exercise fees, and you will be rewarded with two free stocks when you open an account. Robinhood Options Trading Robinhood As the founder of petty cash stock trading, Robinhood also provides an advantageous charging policy for options trading, with 0 commissions, 0 contract fees, and 0 transfer or exercise fees. The easy-to-learn desktop program and mobile client interface allow even novices to quickly master the necessary basic knowledge and start their personal investment experience smoothly. Is trading options risky? Any investment has certain risks, and the difference is different risk types and risk severity. As far as options trading is concerned, the risks that may exist during the trading process include: 1. Price fluctuation risk Options trading, like futures trading, is a leveraged financial derivative. There are many factors that will affect option prices, such as futures underlying price, time, etc. There will be large price fluctuations. This is one of the important risks that investors need to pay attention to. 2. Risk of forced liquidation Forced liquidation, that is, option trading adopts a same-day debt-free settlement system similar to futures trading. After the market closes every day, a margin will be calculated and collected from the option obligor based on the contract settlement price. If the available funds in the margin account of the obligated party are insufficient, they will be required to replenish the margin. If the margin is not replenished within the specified time and the position is not closed on its own, the position will be forcibly closed. 3. Contract expiration risk Options trading has a contract validity time, and different option contracts have different expiration dates. On the expiration date, if the right party fails to exercise the option, the contract will automatically be invalidated and will no longer have any value. Expired contract positions will no longer be displayed in the investor's option contract account. 4. Risk of failure to exercise options The risk of exercise failure refers to the fact that after an investor proposes to exercise the option, if there is not enough option premium in the account, it will be judged as exercise failure and the investor will be unable to exercise the rights conferred by the option contract. What are the similarities and differences between options trading and stock trading? A. Similarities between Options and Stocks Both are financial investment products; They all start trading after making a certain judgment on the future stock price trend of the target stock; B. Differences between options and stocks Different transaction objects Options are options to buy or sell one or more stocks within a certain period in the future; Stocks are actual ownership rights in shares of a company; Different trading directions Options are two-way transactions. You can buy first and then sell, or you can sell first and then buy. Investors can be either buyers or sellers; In stock trading, investors only act as buyers and purchase stocks from the stock issuing company in one direction; Different ways of trading
There are two parts of costs involved in the option trading process: the upfront option fee and the contract preparation fee paid when exercising the option later; A stock transaction is a one-time full transaction, which is the entire cost of actually purchasing the stock; Transaction settlement methods are different The settlement method of option transactions is that the buyer exercises the right before the expiration date of the contract. If the buyer does not exercise the right, the contract will automatically terminate on the expiration date, and the option premium will belong to the seller; In stock trading, investors do not need to settle before the transaction is completed; Transactions have different expiry dates The contract expiration date of option trading is the transaction expiration date Stock trading has no trading expiry date unless the company is delisted Different rights and obligations in transactions In option transactions, the buyer has the right to exercise the option but does not have any obligations; the seller only has the obligation to perform the contract and does not have any rights; In stock transactions, the seller, that is, the stock issuer, has the right to issue stocks and the obligation to disclose operating information on time. The buyer, that is, the stockholder, has rights such as the right to know and the right to audit accounts, and must also fulfill the obligation to bear business risks; FAQ