Options Tutorial: From Beginner to Practical (Fundamentals, Trading Strategies, Hands-On Skills)
Options Education: From Beginner to Practical Application (Fundamental Concepts, Options Strategies, and Real-World Techniques)
Options are a highly practical trading and investment tool, especially during periods of market volatility. They offer the potential to leverage small capital for substantial gains, hedge stock holdings, and enhance upside returns. However, compared with stocks, options are more complex, often leading many beginners to feel discouraged even before they fully grasp the basic concepts.
To help you understand options and learn how to trade them, we've compiled all the essential knowledge you need into this article. The full text may be somewhat lengthy, but we recommend familiarizing yourself with these concepts before you start trading options.
What is an option?
An option is a contract between two parties.
In simple terms: the buyer pays the seller a premium in exchange for the right, on or before a specified date, to buy or sell the underlying asset of the option contract at a predetermined price. The seller receives the premium from the buyer but may be obligated to buy or sell the underlying asset at the agreed-upon price on or before the specified date.
The Five Key Elements of Options
Each options contract comprises five key components: the underlying asset, the option type, the strike price, the premium, and the expiration date.
Before executing each options trade, it is essential to carefully verify this information.
Contract‑related assets: The underlying asset of an option refers to the specific asset that the parties agree to trade upon exercise, including stocks, indices, foreign exchange, and commodities.
Option Types: Options are classified into two types: call options and put options. A call option grants the buyer the right to purchase the underlying asset, while a put option grants the buyer the right to sell the underlying asset.
Strike Price: The price at which the underlying asset is to be bought or sold, as agreed upon by the parties to the option contract.
Option premium: The market price of an options contract, representing the cost paid by the option buyer to the option seller.
Expiration Date: The date on which an options contract expires. If the option buyer fails to exercise the option before expiration, they will forfeit the premium paid. Of course, purchasing or selling an option does not obligate you to hold it until expiration; you may choose to close your position prior to expiration, setting a take-profit or stop-loss order in advance.
Options are classified as American-style and European-style, with the key difference being that the holder of an American option may exercise it on any day up to and including the expiration date, whereas the holder of a European option may exercise it only on the expiration date itself. You can…FutubullGo to the specific options page to view the option type.
For example, the option shown in the screenshot is a put option on Apple (AAPL), with an expiration date of April 19, 2024, a strike price of 177.50, and a premium of 4.40.
Further Reading:[5 Key Points to Remember When Trading Options]
Options Strategy: Meaning of Call and Put Options
Four Types of Options: This Strategy / One-Leg Option Strategy
Since options are categorized into call options and put options, and each can be traded in either a long or short position, four basic strategies—also known as single-leg or unidirectional strategies—can be constructed:
Buy a long call option
Sell/Short a Call Option
Buy a long put option
Sell/Short a Put Option
We can clearly see, as illustrated below, the rights and obligations associated with buying and selling options, as well as the applicable scenarios for each of the four strategies:
Further Reading:[Four Basic Option Strategies]
If you'd like to systematically learn more introductory options courses, you can watch the instructional videos for free:[Options Basics: An Explanation of Three Practical Option Features]
Factors Affecting Option Pricing
Whether for hedging risks or for capturing the bid–ask spread, option premiums are a critical factor.
For the option buyer, the premium is the cost that must be paid; for the option seller, the premium represents the maximum profit that can be realized immediately.
Typically, when we are bullish on a stock's future price movement, we can buy a call option; conversely, if we are bearish, we can buy a put option. However, in practice, it is not uncommon for the underlying stock price to rise while the price of the corresponding call option fails to increase accordingly. Why is this the case?
This requires an understanding of the factors that influence option prices (premiums). An option's price comprises intrinsic value and time value.
Intrinsic value
The intrinsic value of an option is closely tied to the price of the underlying stock. Simply put, if you buy a call option and the underlying stock price rises sharply, the call option's intrinsic value will increase; conversely, if the stock price falls, the call option's intrinsic value will decline.
The relationship between the option's strike price and the underlying stock's market price falls into three categories:
In-the-money Option: A call option whose strike price is below the current market price of the underlying stock, or a put option whose strike price is above the current market price of the underlying stock.
Out-of-the-Money Option: A call option with a strike price higher than the underlying stock's current market price, or a put option with a strike price lower than the underlying stock's market price.
At-the-money Option: An option whose strike price is equal to the underlying stock's market price.
If you hold an option, it can only be exercised when it is in-the-money. Consequently, out-of-the-money options typically trade at lower prices than in-the-money options, with correspondingly higher potential risks and rewards.
When we are conducting hands-on practice, we typically useOptions chainThe options chain is a feature that allows you to filter options by type, expiration date, and strike price. With the options chain, you can clearly see how option prices vary across different strike prices.
As shown in the figure, the left side depicts a call option, while the right side depicts a put option. The black horizontal line in the middle represents the current price of the underlying stock.
In the figure, the blue-shaded area represents in-the-money options, while the remaining regions correspond to out-of-the-money options. We can clearly observe how option prices vary.
Time value
Time value is influenced by the remaining time until the option contract expires. If you are the buyer of an option, keep in mind that its time value gradually diminishes as the expiration date approaches. For example, even if the underlying stock price remains unchanged after purchasing the option, the option's price will still erode over time.
In the options chain, it is evident that, for both in-the-money and out-of-the-money options, option prices tend to be lower as the expiration date approaches.
In addition, it's important to note that the closer an option is to its expiration date, the greater its price volatility and the higher the associated risk. Options that expire on the same day are referred to as "expiration‑day options." These options are highly sensitive to changes in the underlying stock's price and often experience sharp spikes or plunges, making them extremely risky.
If you're a beginner with a low risk tolerance, you can opt for options with longer expiration dates, such as those expiring in 1 to 3 months.
In addition, there are other factors that influence option prices, such as implied volatility. For more information, please refer to: [What is the real mystery behind changes in option prices?】
Options Pricing Calculator: Quickly Calculate Theoretical Option Prices
You might ask: how can you tell whether an option's current price is reasonable? Could it suddenly drop after you buy it? An options pricing calculator is a great tool for comparing the market price of an option with its theoretical value, helping you assess whether the current price is justified. Use…Futubull, seize every options trading opportunity!
How to Trade Stock Options
If you're a beginner, you can start by selecting the stock that will serve as the underlying asset for your options.
For example, suppose you want to trade options on Apple (AAPL). You can search for Apple or AAPL in the Futubull app, select "Options" in the lower-left corner, and then go to the "Option Chain" page.
In the options chain, select the expiration date and strike price, then double-click a specific option to access its quote page and place your trade.
How to trade options through Futu
1. Before trading options, you must first open a securities account. For new customers who open an account during the promotional period, you can receive a $2,188 incentive reward!
2. If you'd like to learn more about the detailed steps, analytical tools, and key considerations for trading U.S. stock options, you can access free training:Options Beginner's Guide
Further Reading:U.S. stock options fees，Hong Kong Stock Options Fees，Futu Options Service
Other Common Option Strategies
In addition to the four basic strategies, options with different strike prices or directional exposures can be combined into more complex strategies to align with diverse trading objectives.
1. Covered Call Strategy
Covered CallIt is a strategy that combines a stock position with options. This approach is suitable for investors who hold stocks but anticipate a short-term decline in the stock price and seek to hedge their risk using options.
For example, suppose Judy holds 100 shares of Stock A but anticipates some near-term volatility. To hedge against the risk of a price decline, she could implement a covered call strategy as follows:
In the Futubull app, go to the details page of your long‑stock position and tap "Options" at the bottom left to access the options chain.
Select the "Call" direction; choose an expiration date, such as "April 5"; then select a strike price, for example, 530.
Click the corresponding option; a pop-up window will appear at the bottom of the page. Select the "Sell" trade direction and review information such as the option's break-even point. Then, click "Trade."
Set the sell price and quantity (if you hold 100 shares, you can sell up to 1 option contract).
As shown in the figure, if Judy sells one A‑option expiring on April 5 with a strike price of $530 at the day's market price of $6.05, she will receive $605 in proceeds immediately upon execution of the order.
If, before the option's expiration date, Stock A's price rises above the strike price of $530, the option holder may exercise the option, obligating Judy to sell 100 shares of Stock A at the $530 strike price. However, in turn, such a price increase can also generate positive returns for Judy.
If the stock price does not rise above the strike price of $530, Judy can pocket the $605 option premium, thereby partially hedging against the risk of a decline in the underlying stock's price.
Further Reading:[Can you make pocket money even in a volatile stock market? This options strategy delivers both protection and returns.]
2. Short Put
How do renowned investors employ options strategies? Many people recall the classic example of "stock market guru" Warren Buffett:
Buffett began buying Coca-Cola shares in 1988. In April 1993, believing that Coca-Cola's stock price was too high, he sold 5 million put options on Coca-Cola with a strike price of $35, expiring on December 27. Immediately after selling the options, Buffett received $7.5 million in option premiums.
In this case, if Coca-Cola's stock price falls below the strike price of $35 before the option expires, the option that Buffett sold will become an in-the-money option. When the option buyer exercises it, Buffett can purchase a large number of shares at a lower price. Conversely, if Coca-Cola's stock price does not drop below $35, the option will be out-of-the-money, and the option buyer will choose not to exercise it, allowing Buffett to pocket the $7.5 million premium he received from selling the option.
Whether it's acquiring shares at a low price or collecting option premiums, both approaches benefit Warren Buffett. This seemingly win-win strategy is known as shorting a put—selling a put option. It's suitable not only for institutional investors but also for individual investors.
Short PutThis strategy is suitable when you already hold the underlying stock and remain bullish on the company's long-term prospects, with the intention of adding to your position at a lower price. Under this approach, you sell a put option with a strike price that reflects your perceived fair value. By contrast, selling an option without holding the underlying stock constitutes a "naked short option," which carries significantly higher risk and requires a larger margin deposit.
3. Buy a Long Straddle Position
If a major event that could significantly impact the entire stock market or a specific stock is about to occur, yet it's difficult to predict how the market or the stock price will move afterward, a classic strategy can be employed.Long StraddleTo implement this strategy, you need to simultaneously purchase one call option and one put option on the same underlying stock, both with the same strike price and expiration date.
Suppose Jerry predicts that Tesla will soon release a major announcement, which he expects will cause significant short-term volatility in the stock price, but he's unsure whether the price will rise or fall. He can use Futubull's combination strategy feature to quickly set up a Long Straddle position:
Enter Tesla's options chain and select the "saddle strategy" at the bottom of the page.
Select an expiration date, such as "April 19"; choose a strike price, for example, 177.5; and select "Buy" as the trade direction.
Drag the bottom pop-up upward to view the break-even point after purchasing this strategy, as well as the profit-and-loss chart for the options portfolio.
Click Trade to simultaneously buy the selected call and put options.
>>The design images displayed on the screen are for illustrative purposes only and do not constitute any investment advice or guarantee.
Based on the break-even point and the profit-and-loss diagram, we can see that after Jerry's options‑combination order is executed, the strategy will generate a profit as long as the underlying stock price remains above 198.5 or below 156.5 prior to the option's expiration. However, if the stock price falls within the 156.5–198.5 range, the strategy will incur a loss, with the maximum potential loss estimated at the $2,078 cost of purchasing the combination.
If you'd like to learn more about saddle-style combinations, click:[Use a bull call spread to capture returns]
More free courses on advanced options combination strategies:[Advanced Combination Options Strategy]
Three steps to build an options strategy—making investing simple and efficient!
Market conditions change in the blink of an eye, and there are so many options strategies that it's hard to know which one to choose. Futubull's latest desktop version helps you build an options strategy tailored to the current market situation in just three steps—whether the market is rising or falling, you can strike with precision, seize investment opportunities from every angle, and become an options expert!Download the latest Futubull desktop version now!
Margin relief for 11 options strategies!
Futu offers 13 types of combination options, and you can also customize your own strategy portfolio!Download Futubull nowA user-friendly options trading platform with comprehensive data—place orders with a single click! Enjoy margin waivers on 11 option strategies, and new clients can even claim a limited-time $2,188 options bonus! *Subject to the relevant terms and conditions.。
Practical Tip: Estimating Stock Price Volatility Using Options' Implied Volatility
During earnings season, stock markets typically experience significant volatility, which can present potential trading opportunities for investors. But how can we gauge the magnitude of a stock's post‑earnings move—whether it will rise or fall? Investors and traders can leverage a tool known as "expected volatility" to forecast earnings‑related price movements.
Expected move refers to the anticipated range of a stock's price change, calculated based on current option prices.
By gauging expected volatility, investors and traders can gain insight into the options market's forecasts for price movements of a particular stock or ETF over a given time frame. This helps traders identify potential trading opportunities and manage risk, especially in the lead-up to major events such as earnings releases, the publication of macroeconomic indicators, or FDA announcements.
The simplest method for estimating expected volatility is to multiply the at-the-money long straddle price by 85%.
Simply put, to estimate the expected volatility of a particular stock during earnings week, you can follow these steps:
Select the first option expiration date following the company's earnings release.
Look up the options chain and add the prices of the at-the-money call and at-the-money put options to obtain the price of the saddle option combination.
Then, multiplying this value by 85% yields the expected volatility—the range within which the stock's price is likely to fluctuate. Alternatively, you can divide the result by the stock's current price to express the expected volatility as a percentage.
However, it is worth noting that calculating expected volatility only reflects the magnitude of the stock price's expected fluctuation; the direction remains uncertain. In other words, the stock price could either rise or fall.
Options Volatility Analysis: Determining Whether an Option Is Overvalued or Undervalued
Implied Volatility (IV)It is the volatility inferred from option market prices, reflecting market participants' expectations about future stock price fluctuations. In other words, IV is not based on historical data but rather on the market's "forecast." High IV indicates that the market anticipates significant price swings—for example, around earnings announcements or in the lead-up to policy events. The higher the IV, the greater the expected future volatility, and the higher both the option price and the premium.
You can use Futubull's options volatility analysis to quickly see an asset's implied volatility (IV), IV levels, historical volatility (HV), and the relationship between earnings release dates and changes in volatility. This way, you can avoid entering at high IV, which would result in "buying expensive options"!
[Hello, Teacher Niuniu] Sharing and teaching from an options expert—covering implied volatility and historical volatility!
Seize the opportunities during earnings season—turning it into a gold rush.
There are too many favorite stocks to keep track of—can't remember their earnings release dates? Futubull has marked the earnings release days on the options chain, so you can check at any time which stocks are about to report—and uncover opportunities to make money before and after the earnings season!
Further Reading:[Will the stock price surge after earnings? A simple formula can help you calculate the potential upside.]
Futu Algo trading: a powerful tool for short-term trading
Futu Alogo Trading is a no-code algorithmic trading platform that eliminates the need for manual coding. You can directly translate your investment strategies into code, allowing your computer to execute trades and boost investment efficiency. It runs automatically 24/7, so you don't have to monitor the market, saving you time and effort.
This content is for reference only and should not be construed as an offer, solicitation, invitation, or recommendation to buy or sell any investment product or to make any investment decision, nor should it be interpreted as professional advice. Options contracts are derivative products and may not be suitable for all investors. You should carefully assess whether such trading is appropriate for you, taking into account your investment experience, investment objectives, financial resources, and other relevant factors. The risk of loss when trading options contracts can be substantial. In certain circumstances, your losses may exceed the initial margin deposit. Even if you set contingency instructions, such as "stop-loss" or "limit price" orders, these may not necessarily prevent losses. Market conditions may render such instructions unexecutable. You may be required to deposit additional margin within a short period. If you fail to provide the required amount by the specified deadline, your open positions may be liquidated. However, you will remain liable for any resulting shortfall in your account. Therefore, before engaging in such trading, you should thoroughly research and understand index options, and carefully consider whether this type of trading aligns with your financial situation and investment objectives. If you trade options, you should familiarize yourself with the procedures for exercising options and handling option expirations, as well as your rights and responsibilities upon exercise and at expiration. "Futubull" is a one-stop financial investment trading platform, with securities services provided by Futu Securities International (Hong Kong) Limited.
