Options Workshop 2: Trading options, order types and the disposition of an option

Exchange-traded options are bought and sold through brokers such as moomoo on established exchanges. These exchanges operate under strict rules and are supported by a clearing house, which guarantees the performance of all option contracts and removes counterparty risk between buyers and sellers.

To place an options order, you must first access your moomoo account and select the specific option contract you wish to trade. This involves choosing:

– the underlying security (e.g. a share or index),

– the expiry date (weekly, monthly, or longer-dated),

– the strike price, and

– whether you want to buy or sell a call or a put.

Choosing the strike price and expiry is a key strategic decision.

– Near-term expiries are cheaper but decay faster and are more sensitive to short-term price moves.

– Longer-dated expiries cost more but provide more time for the trade thesis to play out and are less affected by time decay on a day-to-day basis.

When selecting the strike price, focus on the relationship between the strike and the current market price of the underlying asset. This determines whether the option is at-the-money (ATM), out-of-the-money (OTM), or in-the-money (ITM) — a crucial factor in balancing cost, risk, and probability of success.

– At-the-money (ATM) options are closest to the current share price and are the most sensitive to price movement. They provide the greatest leverage for short-term directional trades and are typically preferred when expecting a strong move over a short timeframe.

– Out-of-the-money (OTM) options are cheaper and offer higher potential percentage returns, but they require a larger move in the underlying to become profitable. These are best suited to high-conviction, high-volatility trades where a sharp price move is expected.

– In-the-money (ITM) options cost more upfront but contain intrinsic value and generally move more closely with the underlying asset due to their higher delta. Use ITM options when wanting a higher probability trade with smoother price behaviour and reduced time decay impact.

In practice, strike selection balances conviction, timeframe, volatility, and risk tolerance, ensuring the option structure aligns with the specific trade setup and market conditions.

Once selected, you can enter your order details, specifying the quantity and order type—such as market or limit order. A market order executes immediately at the best available price, prioritising speed but not price certainty. A limit order sets a maximum (when buying) or minimum (when selling) price, prioritising price control over immediacy.

The bid-ask spread refers to the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an option. This spread reflects liquidity, which can be thought of in terms of:

– Immediacy – how quickly you can execute a trade at or near the quoted price.

– Resilience – how well prices recover after trades occur.

Highly liquid options (such as near-term options on large-cap stocks or major indices) tend to have narrow spreads, meaning traders can enter and exit positions quickly with minimal price impact. Illiquid options often have wide spreads, meaning traders may need to accept worse prices or wait longer for execution, increasing trading costs and risk.

The last trade is the price at which the most recent transaction occurred, but it may not reflect the current market value—especially in illiquid markets where trades occur infrequently.

When placing an order, you might need to cross the spread, meaning you accept a less favourable price (paying the ask when buying or selling at the bid) to ensure execution. Alternatively, you can place a limit order inside the spread, potentially achieving a better price if other market participants respond.

moomoo acts as the intermediary, routing your order to the exchange. The clearing house sits behind the exchange and becomes the buyer to every seller and the seller to every buyer, guaranteeing settlement. moomoo may charge commissions or fees for each trade, and platform features such as real-time quotes, depth of market, and order routing quality can materially affect execution outcomes and overall profitability.

When you place an options order, the counterparty may be:

– another retail trader,

– an institutional investor (such as a hedge fund or superannuation fund), or

– a market maker.

Market makers are professional firms that provide liquidity by continuously quoting bid and ask prices. They earn profits primarily from the bid-ask spread and play a crucial role in maintaining market immediacy and resilience. Institutional investors typically trade larger volumes and may influence prices through their size and strategy. Retail investors generally trade smaller sizes and shorter time horizons.

Although you trade through an exchange, the clearing house guarantees performance and handles settlement and assignment, ensuring the system functions smoothly even if one participant fails.

Once you hold an options position, you have several choices as expiry approaches or market conditions change. Options provide flexibility, but each choice carries specific rights, obligations, and risks.

• Offset the position:
The buyer can sell the same option contract at any time before expiry to close the position. This allows profits to be realised or losses limited without exercising the option.

• Exercise early (American-style options):
American-style options may be exercised at any time before expiry. Early exercise is uncommon for calls unless dividends are involved but may occur for deep ITM options where remaining time value is minimal.

• Automatic exercise at expiry (if ITM):
If an option expires in the money, the clearing house will typically automatically exercise it on behalf of the buyer unless instructions are given not to. This ensures the buyer receives the intrinsic value of the option.

• Allow the option to expire worthless (if OTM):
If the option is out of the money at expiry, it expires with no value. The buyer’s maximum loss is limited to the premium paid.

Rights of the buyer:
Option buyers have the right but not the obligation to exercise. This limited-risk feature is one of the key attractions of options trading, as losses are known upfront while potential gains may be substantial.

• Buy to close:
Sellers can close their position by purchasing the same option contract in the market. This removes their obligation and is commonly used to manage risk or lock in profits.

• Assignment risk:
Sellers of American-style options can be assigned at any time. Assignment is handled by the clearing house and allocated randomly among open sellers.

• Obligations upon assignment:

– Sold call: obligation to deliver the underlying shares at the strike price.

– Sold put: obligation to take delivery (buy) the underlying shares at the strike price.

These obligations can require significant capital. Covered call sellers already own the shares, while uncovered (naked) positions carry substantially higher risk.

Sellers must monitor positions carefully, particularly as options move ITM or approach expiry. Failure to meet assignment obligations may result in forced transactions or penalties imposed by the broker.

Both buyers and sellers may choose to roll an option position. Rolling involves closing an existing position and simultaneously opening a new one with:

– a later expiry,

– a different strike price, or

– both.

– A trader with a short call nearing expiry may roll it to the next month to extend income generation while adjusting strike to manage risk.

- A long call holder may roll up to a higher strike to lock in gains while maintaining bullish exposure

Rolling is not risk-free: it involves transaction costs, potential slippage, and exposure to new market conditions.

Once traders are comfortable with basic positions, they may use multi-leg strategies such as spreads. For example:

– A bear call spread limits upside risk by combining a short call with a long call at a higher strike.

– A bull put spread limits downside risk by combining a short put with a long put at a lower strike.

These strategies can reduce risk and margin requirements but add complexity. Traders must understand assignment risk, margin treatment, and how volatility and time decay affect multi-leg positions.

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Now let’s look at some actual examples of buying call options on Microsoft shares between May and August 2025.  

Microsoft reports its earnings on a quarterly basis usually at the beginning of the second month in the quarter, in this case May and August 2025.  The trader entered two highly speculative trades on the quarterly result as they believed that the price of Microsoft would rise significantly on a good financial result.  

Before the market closed on 1st May Microsoft was trading at approximately US$395 per share.  The trader bought 1 lot of the May monthly option that expired on the 16th of May with a strike price of US$400.  The premium paid was US$7.76 per share or US$776 for one options contract.  After the market closed Microsoft reported a great result.  Microsoft’s price opened at US$431.11 on the main next trading session.  The trader sold to close the position at a price of US$32.40 per share or US$3240 per contract.  Ignoring the commissions the profit on the trade was US$2464 in 19 hours.  

Taking most of the profit but still wanting to maintain a bought call the trader rolled the position up to an 18 July US$465 strike call.  He held this position for 26 days and then again rolled the position to an August US$500.  Again, these were profitable trades making US$550 and US$605, respectively.

A similar trade to the first was conducted prior to the Q2 result in early August.  The trader opened the position earlier and held the position for a longer period but again closed out the position on the day after the quarterly result.  In this case the August weekly option was bought for $1070 and sold for $3740 approximately one week later.

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Not all trades work out!

In late October 2025 Meta was trading at approximately $750 per share.  With earnings imminent the trader bought a call expiring on 16 January 2026.  The strike was deep OTM at $1000 and the premium was $4.40 or $440 per option.  

The trader placed a stop limit order with a $4 trigger and $3.75 limit price.

Meta’s reporting was OK but guidance was mediocre.  The Meta stock price opened the next day sharply lower at $669.15 and the call opened at $1.16 or $116 down 74%.  

The options price gapped below the stop at $4 and placed a limit order at $3.75.  The trader has maintained the position for the time but lowered the sell order to a price of $2.20 which was subsequently filled.

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Options trading involves multiple risks, including:

– Time decay (theta) eroding option value.

– Volatility changes affecting premiums.

– Liquidity risk leading to poor execution.

– Assignment risk for sellers.

– Leverage risk, where small price moves in the underlying can produce large gains or losses.

Successful options trading requires careful planning, disciplined risk management, and a clear understanding of both rights and obligations.