Want to profit from options? First, understand these four trading methods.

What are options? Many investors are both interested in and unfamiliar with this financial derivative. In simple terms, an option is a contract that grants the buyer the right (but not the obligation) to buy or sell an asset at a predetermined price on a future date. This characteristic determines the unique value of options—they can profit in rising markets and also seek opportunities in falling or volatile markets.

Why Do Options Become a Choice for Investors?

Compared to directly buying and selling stocks, options have three main attractions:

Leverage Effect. You only need to pay a small premium (the option premium) to control an asset worth multiple times your investment. One US stock option contract represents 100 shares, meaning a small amount of capital can leverage a large position.

Multi-directional Profit Mechanism. Whether the market rises, falls, or consolidates, there are corresponding options strategies. Bullish outlook? Buy call options. Bearish outlook? Buy put options. Or sell options in a volatile market to collect premiums.

Hedging Tool. Holding a stock but worried about short-term pullbacks? Buying put options can serve as “insurance,” protecting your portfolio value while maintaining upside potential.

However, options also carry risks due to their leverage and complexity. Understanding their trading mechanisms and risk management methods is a necessary lesson before entering the market.

Six Elements to Read an Options Quote Table

To participate in options trading, you must first understand the quotation information of the options contract. Each options quote includes the following elements:

1. Underlying Asset. The “underlying”—could be a stock, index, commodity, or other asset.

2. Trading Direction. Two categories: rights to buy the asset are called “call options,” rights to sell are called “put options.”

3. Strike Price. The agreed-upon buy/sell price in the contract, crucial for calculating profits.

4. Expiration Date. The deadline of the option’s validity. Choosing the right expiration is key—for example, if a company’s earnings report is expected to disappoint, select options expiring after the report to capture the reaction time.

5. Option Price. The premium paid by the buyer to the seller, usually calculated per share.

6. Contract Multiplier. Standard US stock options are 1 contract = 100 shares of the underlying stock. Therefore, the actual premium paid = quote × 100. For example, a quote of $6.93 means an actual payment of $693.

Four Basic Trading Strategies Explained

Strategy 1: Buying Call Options

This is the most basic bullish strategy. Buying a call option is like purchasing a “discount coupon”—the holder has the right to buy the stock at the strike price before expiration.

Profit Logic: The higher the stock price, the greater the profit. Suppose the stock is at $175, and you buy a $180 strike call with a premium of $6.93 ($693 total). If the stock rises to $200, you can exercise at $180 and sell at market price $200, earning the difference. Your maximum loss is limited to the premium paid—if the stock stays below $180, you let the option expire worthless, losing only the premium.

This strategy’s risk is controllable, and the profit potential is unlimited, making it especially suitable for investors bullish on a stock but with limited risk appetite.

Strategy 2: Buying Put Options

This is the traditional way to bet on a decline. Buying a put gives the holder the right to sell the stock at a fixed price before expiration.

Profit Logic: The lower the stock price, the greater the profit. If the stock drops to $150, and your strike is $160, you can sell at $160 and buy back at $150, earning the difference. Similarly, the maximum loss is limited to the premium paid, with limited upside but strong downside protection.

Buying puts is also a common hedging tool. Investors holding stocks can buy puts to protect their positions, activating protection during sharp declines.

Strategy 3: Selling Call Options

Role reversal—becoming the option seller. Selling a call means you commit to selling the stock at the strike price if the buyer exercises.

Profit and Risk Reversal: The maximum profit is the premium received. But if the stock surges well above the strike, you may be forced to sell at a lower price, incurring losses that can be many times the premium. This is a typical “small gains, big losses” scenario—small profit potential versus large risk. Selling calls requires sufficient capital reserves to cover worst-case scenarios.

Strategy 4: Selling Put Options

Selling a put is a bet that the stock price will not fall significantly. The maximum profit is the premium received, but if the stock drops below the strike, the seller must fulfill the contract, buying the stock at the strike price, which may be worth less.

Risk Example: Suppose a $160 strike put with a premium of $3.61 (income of $361). If the stock drops to zero, you need to pay $160×100=$16,000 to buy the stock, minus the premium received, net loss is $15,639. This is far riskier than buying puts, which limits maximum loss to the premium paid.

Four Layers of Risk Management in Options Trading

While options are flexible, risk management is crucial. The following four principles form a protective net:

First Layer: Avoid Naked Selling. Do not sell more options than you own (no net short positions). Naked short positions carry unlimited risk. Conversely, net long or neutral positions have predictable, measurable losses.

Second Layer: Control Position Size Reasonably. Avoid over-leverage. Especially when employing multiple sell strategies, base risk calculations on the total notional value of the contracts, not just the margin. For example, selling a $172 strike option involves a risk of $17,200 (172×100), not just the margin.

Third Layer: Diversify the Portfolio. Do not concentrate all options positions in a single stock, index, or commodity. Cross-asset and cross-sector diversification can effectively reduce the impact of black swan events.

Fourth Layer: Set Stop-Losses. Especially for net short positions, stop-loss is a necessary safeguard. For net long or neutral positions, since maximum loss is already capped, stop-loss requirements are lower.

Options vs Futures vs Contracts for Difference (CFDs)

Three derivative tools each have their strengths:

Options — Buyers have rights, not obligations; sellers bear obligations. Leverage is moderate (usually 20-100x), trading costs are lower, suitable for investors with moderate risk appetite and clear expectations.

Futures — Both parties have obligations; contracts must be settled at expiry. High leverage (usually 10-20x), highly responsive to short-term volatility, suitable for capturing narrow price swings and time-sensitive trades.

CFDs — No physical delivery, only settle the price difference. Leverage can reach 200x, initial capital requirements are very low (a few dollars), but risk is also highest, with rapid liquidation possible due to price swings.

Choosing the right tool depends on your forecast horizon, risk tolerance, and capital. Confident in stocks short-term but worried about costs? Options. Want to catch short-term commodity moves? Futures. Small account but want high leverage? CFDs.

Final Advice

What are options, and how to trade them? The ultimate answer points to a common logic—they are tools to help you realize your expectations at the right time and price. But tools only work when your judgment is correct.

Therefore, whether choosing options or other derivatives, thorough fundamental analysis, technical research, and sound capital management are the foundation of success. The leverage of options amplifies gains but also errors, so respecting the market and controlling risks is more valuable than chasing quick profits.