U.S. Stock Options Trading Guide: Mastering Options Investment Strategies from Scratch

Why Learn About US Stock Options?

Many investors only know how to buy stocks to make money, but in fact, there are ways to profit during market volatility and downturns. Options (also known as call and put options) are financial derivatives that allow traders to find opportunities in various market environments.

Unlike traditional stock investing, options offer more flexibility. You can bet on rising markets in a bull run, position for declines in a bear market, or collect time value during sideways trading. This is why professional investors favor options as tools for speculation and hedging.

Core Concepts of Options

What are options?

Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset (stocks, indices, commodities, etc.) at a predetermined price at a future date. The key is the “right,” not the “obligation” — you can choose to exercise or to abandon the contract.

Two types of options:

• Call options: The buyer has the right to buy the asset at the agreed price
• Put options: The buyer has the right to sell the asset at the agreed price

Advantages of options compared to other investment tools:

1. Leverage with low cost: You only pay a small premium (option fee) to control a much larger position
2. Multiple profit directions: You can profit whether the market goes up, down, or sideways using different strategies
3. Risk management tools: If you hold stocks and worry about downside risk, buying puts can hedge your position

Basic Terminology of US Stock Options

Before trading, you must familiarize yourself with these key terms:

• Call: The right to buy the underlying asset, used when expecting price increases
• Put: The right to sell the underlying asset, used when expecting price decreases
• Premium: The fee paid by the buyer to the seller for the option
• Strike Price (Exercise Price): The fixed price used when exercising the option in the future
• Expiration Date: The deadline for the option contract; after this, it cannot be exercised
• Contract Multiplier: Standardized to 100 shares per option in US markets

How to Read US Stock Option Quotes

Option quotes include 6 core elements, all essential:

1. Underlying Asset — The asset being traded (e.g., Tesla stock TSLA.US)

2. Trade Direction — Choosing call or put

3. Strike Price — The fixed price at which you can buy or sell in the future

4. Expiration Date — The date by which you must decide to exercise. When choosing expiration, consider the expected timeframe of price movement. For example: if you anticipate a company’s earnings report will disappoint, select an expiration date after the report release.

5. Option Price — The premium the buyer pays

6. Contract Quantity and Actual Cost — Each US stock option represents 100 shares. For example, if the option price is $3.5, the total cost is $3.5×100=$350.

Four Basic US Stock Options Trading Strategies

Buy Call Options — Bullish on the market

Logic: Pay the premium to gain the right to buy at a fixed price in the future. If the stock price rises, you can buy low and sell high, earning the difference.

Example: You buy a Tesla(TSLA.US) call option when the stock is $175, with a premium of $6.93 and a strike price of $180. You pay $693 ($6.93×100) for this contract.

• If the stock drops to $170: you abandon the exercise, losing $693
• If the stock rises to $190: you buy at $180, sell at $188, profit of $8 per share×100=$800, minus $693 cost, net profit of $107

Risk profile: Maximum loss = premium paid; unlimited upside potential

Buy Put Options — Bearish on declines

Logic: Pay the premium to gain the right to sell at a fixed price in the future. If the stock drops, you can sell high and buy back lower, earning the difference.

Risk profile: Maximum loss = premium paid; maximum profit = strike price (since stock can go down to zero)

This is a classic hedging method. If you hold Apple stock(AAPL.US) but worry about short-term declines, buying puts acts like insurance for your portfolio.

Sell Call Options — Sideways or slight upward expectation

Logic: You agree to sell the asset at a set price in the future, earning the premium. If the stock doesn’t rise significantly, you keep the entire premium.

Risk warning: This is a “collect premium, risk unlimited” strategy. Your maximum profit = premium received, but potential losses can be unlimited. If the stock surges, you must sell at a lower-than-market price, risking losses far exceeding the premium.

Sell Put Options — Expecting rise or sideways

Logic: You agree to buy the asset at a set price in the future. If the stock doesn’t fall below the strike, you keep the premium.

Risk analysis: For example, selling a $160 strike put and collecting $3.61×100=$361 in premium. But if the stock crashes to zero, you must buy at $160 per share, resulting in a total loss of $160×100 - $361 = $15,639. The maximum risk far exceeds the premium received.

Four Rules for Risk Management in US Stock Options

Success or failure in options trading depends not on the strategy chosen but on how well you control risk.

1. Avoid Net Short Positions

Selling options (especially multiple contracts) carries much higher risk than buying. Losses can be unlimited.

When constructing multi-leg strategies, always check your position:

• Net Long: more contracts bought than sold (limited risk, loss ≤ premium paid)
• Neutral: equal contracts bought and sold (relatively controlled risk)
• Net Short: more contracts sold than bought (unlimited risk, use cautiously)

For example: buy 1 Tesla June $180 call + sell 1 June $190 call + sell 1 June $200 call = net short 1 contract. Adding a June $210 call can restore a neutral position. This allows you to pre-calculate maximum loss.

2. Strictly control individual trade size

Don’t invest too much capital in a single options trade. If the strategy involves paying premiums, be mentally prepared for the money to go to zero.

Decide contract quantities based on total notional value (not margin), because options leverage can amplify both gains and losses.

3. Diversify your holdings

Don’t put all your chips into options on a single stock, index, or commodity. Build a diversified portfolio to spread the risk of concentrated options trading.

4. Set stop-loss mechanisms

For strategies involving net short positions, stop-loss is crucial. Since losses can grow infinitely, predefine a loss threshold and close the position immediately if reached.

In contrast, pure long positions have lower stop-loss requirements because the maximum loss is known (the premium paid).

US Stock Options vs Futures vs Contracts for Difference (CFD)

For investors interested in US stock derivatives, understanding the differences among these is essential:

Selection criteria:

• If you want to capture short-term narrow fluctuations with strong risk tolerance, futures or CFDs are more direct and efficient.
• If options are overpriced or the trading cycle is short with low volatility, CFDs might be more suitable.
• For precise risk management and hedging, options are the best choice.

Essential Preparations Before Trading US Stock Options

Before trading options, brokers require you to fill out an options agreement, assessing your:

• Capital size: Ability to withstand losses
• Trading experience: Past experience with stocks or derivatives
• Knowledge level: Understanding of options mechanisms

Only after approval can you open positions in US stock options.

Final Advice

US stock options are powerful investment tools, but only if you understand how they work and respect the risks.

Options allow you to leverage small capital to control large positions and find opportunities in various market conditions. However, this flexibility also adds complexity. Many traders suffer significant losses by underestimating risks or overconfidence.

Whether you choose options, futures, or other derivatives, success depends on thorough research, disciplined trading plans, and strict risk management. The tools themselves are neither good nor bad; it’s the user’s professionalism that matters. Therefore, investing time in learning and paper trading before risking real money is a worthwhile investment.