Complete Guide to Options Trading: Master the Four Major Trading Strategies and Risk Management in English

Breaking Traditional Investment Frameworks: Why Options Are the Choice of Professional Traders

The logic behind stock investing is straightforward—buy low, sell high. But what if you want to profit in bear markets or volatile conditions? Options are such flexible financial derivatives that allow investors to find profit opportunities regardless of market direction.

Many people don’t realize that the threshold for trading options is lower than imagined, but their complexity is far greater than spot stocks. That’s why every options trader needs to pass a strict approval process with their broker—assessing your capital size, trading experience, and understanding of options.

The Core Nature of Options: A “Future Trading Choice”

Options is the English term, and fundamentally, it’s a bilateral contract. The buyer gains a “right,” not an “obligation,” to buy or sell a specific asset (stocks, indices, commodities, forex, etc.) at a preset price on a future date.

Compared to the one-way nature of stocks, options offer flexibility through:

• Profit strategies in bull, bear, or sideways markets
• Controlling large asset exposure with small margin
• Suitable for both speculation and risk hedging

Why Choose Options Trading? Three Core Advantages

Capital Leverage Advantage

You only need to pay a small margin to control assets worth many times more. For example, buying a Tesla (TSLA) call option might cost only a few hundred dollars in premium but can control thousands of dollars in underlying assets.

Market-Neutral Profitability

• Bullish scenario: Buy call options to profit from rising stock prices
• Bearish scenario: Buy put options to profit from falling stock prices
• Sideways market: Use complex strategies (like bull spreads, straddles) to profit from volatility

Risk Hedging Tool

If you hold a stock but worry about short-term declines, buying a corresponding put option is like purchasing “insurance” for your investment, limiting potential losses within known bounds.

Essential Terms in Options Trading

Before diving into the options world, you need to grasp these core concepts:

Interpreting Option Quotes: How to Quickly Understand a Contract

When you open a trading platform to view option quotes, you’ll typically see the following levels of information:

First Layer: Underlying Asset Identification
Clarify whether it’s a stock, index, or other commodity. For example, Apple (AAPL) options.

Second Layer: Trading Direction Choice
Decide whether to buy a call or put. Buy calls if bullish, buy puts if bearish.

Third Layer: Strike Price Setting
This is the reference point for future execution. Choosing a strike above or below the current market price determines your risk-reward profile.

Fourth Layer: Expiration Date Planning
Time value is central to option valuation. Nearer expiration accelerates time decay. If you expect volatility after earnings reports, select an expiration date after the announcement.

Fifth Layer: Premium Cost
This is the cash outlay for the contract. Premium × 100 = actual expenditure (for US options).

Four Basic Options Trading Strategies

1. Buying Call Options (Long Call)

Logic: You expect the stock price to rise.

• Pay the premium to gain the right to buy at a fixed price in the future
• The more the stock rises, the greater the profit
• If the stock falls below the strike price, your maximum loss is the premium paid, with limited risk

Example:
Suppose Tesla (TSLA) is trading at $175. You buy a call option with a $180 strike price, premium $6.93.

• Cost: $6.93 × 100 = $693
• Max loss: $693 (if stock stays below $180 at expiration)
• If stock rises to $220, you can buy at $180 and sell at $220, earning a $40 profit per share, gross $4,000 profit.

2. Buying Put Options (Long Put)

Logic: You expect the stock price to decline.

• Pay the premium to gain the right to sell at a fixed price in the future
• The more the stock falls, the greater the profit
• If the stock rises above the strike, your loss is limited to the premium paid

This is a common risk hedge. If you hold a stock, buying puts can protect your position.

3. Selling Call Options (Short Call)

Logic: You expect the stock to stay flat or decline.

• Collect the premium upfront as immediate income
• If the stock remains below the strike, you keep the entire premium
• Risk: If the stock surges above the strike, you may need to sell at a lower price, incurring potentially large losses

This is a “collect premium, risk unlimited” strategy. You earn small premiums but face potentially unlimited downside.

4. Selling Put Options (Short Put)

Logic: You expect the stock to stay flat or rise.

• Collect the premium; if the stock rises above the strike, you profit fully
• Risk: If the stock drops sharply, losses can reach “strike price × 100 - premium received”

For example, selling a put with a $160 strike and collecting $361 (3.61 × 100). If the stock drops to zero, your loss is $16,000 - $361 = $15,639.

Risk Management in Options Trading

The core of risk management involves four aspects:

Controlling Position Structure: Avoid Net Short Positions

“Net short” means selling more options than buying. This structure has unlimited risk.

Safe Position Example:

• Buy 1 Call (+1)
• Sell 1 Call (−1)
• Position: Neutral or hedged, risk is controlled

Conversely, such structures can lead to “unlimited losses.”

Strictly Control Investment Amounts

Never commit your entire trading account to a single options strategy. Be mentally prepared for the possibility that the entire investment could be lost—especially when options expire worthless.

For net short strategies, determine the position size based on worst-case total loss, not just margin requirements.

Diversify Your Portfolio

Don’t put all your funds into options on a single underlying. Spread risk across different stocks, indices, or commodities.

Set Stop-Loss Mechanisms

• For net long positions (mainly buying options): maximum loss is known; stop-loss is less urgent
• For net short positions (mainly selling options): unlimited risk; stop-loss is critical
• For neutral positions (balanced buy/sell): set stop-loss flexibly based on strategy goals

Options vs Futures vs CFDs: Choosing the Right Trading Tool

These three derivatives each have their strengths; your choice depends on your trading style, timeframe, and risk appetite:

How to choose?

• Short-term swing trading, quick open/close: CFDs are more direct and efficient
• Expect significant volatility: Options’ volatility premiums are advantageous
• Need precise risk hedging: Options offer unmatched flexibility
• Prefer simplicity: CFDs are the easiest to operate

Conclusion: Options Are Not the End, But a Choice

Options, as financial derivatives, provide flexibility that traditional stock investing cannot. But this flexibility comes with higher complexity and risk.

Whether you choose options, futures, or other tools, the core logic remains: Tools only work when your judgment is correct. This means:

1. Thorough research is essential
2. Risk management is more important than profit expectations
3. Regular review and adjustment of strategies is a habit

The door to options (English: Options) is now open—what matters is whether you are prepared to step in.