Options Workshop 1: options basics every new trader should know

Last week, during my first webinar, I discussed the idea of navigating Netflix earnings with options. The discussion was not about predicting the outcome, but about how options can be used to participate in a potentially volatile event while keeping risk defined.  

Earnings season is when the options market becomes particularly informative. Measures of expected volatility, such as the VIX, often rise, while put–call ratios shift as traders’ position for uncertainty.

According to data from the Options Clearing Corporation, annual options trading volume has reached record levels with approximately 14 billion stock options contracts traded in 2025, reflecting just how central these instruments have become to modern markets.

For many traders, these signals are no longer hidden. Trading platforms such as moomoo display volatility indicators, options volume, and positioning data in real time, making it easier than ever to see what the options market is pricing in. The challenge is not access to information but understanding what it actually means.

Before using options — or the indicators derived from them — it is essential to understand the foundations. Options are not predictions; they are contracts with defined rights, obligations, and risk profiles.

With that in mind, let’s start at the beginning.

Options often sound intimidating, but at their core they are simply financial tools designed to manage risk and opportunity. While electronic trading platforms make options feel modern, the concept itself is ancient. Early versions date back to ancient Greece, where merchants used contracts to secure future access to olive presses. The motivation was the same then as it is today — to reduce uncertainty while retaining flexibility.

Modern options trading began in earnest in 1973 with the launch of the Chicago Board Options Exchange. This introduced standardised contracts, which dramatically improved transparency, liquidity, and risk management. Today, options trade globally on shares, exchange-traded funds, stock indexes, and futures contracts.

Markets do not move in one direction. Prices rise, fall, move sideways, and at times become highly volatile. Options exist to allow investors and traders to respond to these different conditions. They are commonly used for hedging portfolios against losses, generating income, or speculating on future price movements.

Unlike buying shares outright, options allow participants to structure positions that benefit from specific outcomes, often with less capital. This flexibility is both their strength and the reason they must be approached with understanding.

An option is a financial contract. It gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price, on or before a specific date.

The asset referenced by the option is called the underlying. This might be a share, an ETF, an index, or a futures contract. Importantly, buying an option does not mean owning the underlying asset. Instead, the buyer owns a contract whose value is linked to how that asset’s price moves.

The predetermined price in the contract is known as the strike price. This is the price at which the option holder may buy or sell the underlying if they choose to exercise the option.

The date the option contract ends is called the expiration date, or expiry. Once this date passes, the option ceases to exist. If it has not been exercised by expiry, it becomes worthless.

There are two types of options. A call option gives the buyer the right to buy the underlying asset. A put option gives the buyer the right to sell the underlying asset.

Every option involves two parties - the buyer and the seller.  The buyer pays a price for the option. The buyer has a right, not an obligation and will only exercise their right if it is profitable to do so.  The seller receives that payment and takes on an obligation to buy (sold put) or sell (sold call) at the strike price.

This difference is crucial. The buyer has a choice; the seller does not.

The amount paid for the option is called the premium. This premium is paid upfront by the buyer and received by the seller. For the buyer, the premium represents the maximum possible loss. No matter what happens in the market, the buyer cannot lose more than this amount.

• Right to buy the underlying asset at the strike price.

• Suitable when expecting the price to rise.

• In the money when market price > strike price + premium.

• Maximum loss: premium paid.

• Profit potential: unlimited.

• Right to sell the asset at the strike price.

• Suitable when expecting the price to fall.

• In the money when market price < strike price.

• Risk: limited to the premium paid.

• Profit increases as price falls but is capped (price can't go below zero).

The seller, however, faces a very different risk profile. While their maximum profit is limited to the premium received, their potential losses can be large, particularly if the option is not covered by an existing position in the underlying asset. Risk can be significant.

• Obligation to sell the asset if assigned.

• Risky if the asset price rises sharply.

• Unlimited risk in uncovered (naked) call writing.

• Profit limited to the premium received.

• Obligation to buy the asset if assigned.

• Suitable when expecting the asset to remain stable or rise.

• If price drops, may have to buy a worthless asset at full strike price.

Understanding these asymmetric risk profiles is essential before trading options. Options are not inherently risky but misunderstanding them is.