Options Trading Essentials: The Definitive Guide for Hong Kong Investors

In addition to directly buying and selling stocks, options trading offers Hong Kong investors more flexible investment strategies. With global financial markets becoming increasingly interconnected, more and more Hong Kong investors are looking to use U.S. stock options to access international markets, manage portfolio risk, or seek higher returns. This guide will provide a detailed overview of the fundamentals of options, how they work, trading strategies, and key points in risk management, helping you build a solid foundation in options trading.

What Are Options

An option is a type of financial derivative that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time frame. After paying the option premium, the buyer acquires this right, while the seller takes on the corresponding contractual obligation.

Unlike direct asset transactions, options trading involves buying and selling “rights.” This structure allows investors to participate in the market with less capital, while also offering unique approaches to risk management and strategic investing. Among global options markets, the U.S. stock options market is one of the largest and most liquid, encompassing major index members as well as popular stocks.

Key Elements of an Options Contract

Each options contract includes five core components:

Underlying Asset: The asset tied to the options contract, including stocks, indices, commodities, bonds, or currencies.

Contract Size: The trading unit for each options contract. For U.S. stock options, the standard size is 100 shares, meaning each contract covers the right to 100 shares of the underlying stock. Therefore, you need to multiply the quoted option price by 100 to arrive at the actual trade amount.

Strike Price: The preset price at which the option holder can buy or sell the underlying asset, also called the exercise price.

Expiration Date: The validity period of the options contract. Common U.S. stock options include monthly expirations (usually the third Friday of each month) and weekly expirations (every Friday).

Option Premium: The fee paid by the buyer to the seller for acquiring the options right, and also serves as the buyer’s maximum possible loss.

Understanding these basic elements is the first step toward mastering options trading. Longbridge’s investment products include U.S. stock options, enabling Hong Kong investors to participate in global markets.

The Two Main Types of Options

Options are divided into two basic types: call options and put options, each with distinct market perspectives and use cases.

Call Option

A call option gives the holder the right to buy the underlying asset at the strike price before the expiration date. Investors turn to call options when they expect the asset’s price to rise.

Practical Example: Suppose a stock currently trades at $50 per share. You buy a call option with a $55 strike price that expires in one month, paying a premium of $2 per share (total contract cost: $200). If the stock price rises to $65 at expiration, you can buy shares at $55, earning $8 per share (65-55-2), for a total profit of $800 per contract. Conversely, if the stock price falls to or remains below $55, the option expires worthless and your loss is limited to the initial $200 premium.

Put Option

A put option gives the holder the right to sell the underlying asset at the strike price before the expiration date. Investors use put options when they anticipate a decline in asset prices.

Practical Example: Suppose a stock is currently priced at $60 per share. You buy a put option with a $55 strike price expiring in one month, paying a premium of $1.5 per share (total contract cost: $150). If the price falls to $45 at expiration, you can sell shares at $55, making $8.5 per share (55-45-1.5), or $850 per contract. If the price rises or stays above $55, the option becomes worthless, and your maximum loss is the $150 premium.

Tip: Most U.S. equity and ETF options are American-style, meaning they can be exercised at any time before expiration. Most U.S. index options, however, are European-style and can only be exercised on the expiration date.

The Four Basic Options Trading Strategies

Options trades can be combined into four basic strategies, suited to different market views and risk appetites.

Long Call

Market View: Bullish on the asset's price rising

Risk Characteristic: Limited risk (the premium paid); theoretically unlimited potential profit

Best For: Expecting a significant rise in the asset’s price but wanting to limit downside risk

This is the most straightforward bullish strategy: the maximum loss is just the premium paid, and if the stock rallies, you can capture potentially substantial gains.

Short Call

Market View: Bearish or expecting the asset price to stay flat

Risk Characteristic: Limited profit (the premium received); theoretically unlimited loss potential

Best For: Holding the underlying asset and seeking extra income, or expecting the asset price to stay flat

Selling call options carries substantial risk, as sharp rises in the asset's price can lead to unlimited losses for the seller. Therefore, this strategy is often paired with holding the underlying stock as a covered call.

Long Put

Market View: Bearish, expecting the asset price to fall

Risk Characteristic: Limited risk (premium paid); limited profit potential (if the asset price drops to zero)

Best For: Expecting a decline in the asset price or wanting to hedge existing holdings

Buying a put option can serve as portfolio “insurance,” capping downside risk.

Short Put

Market View: Bullish or expecting the price to remain flat

Risk Characteristic: Limited profit (premium received); limited but potentially significant loss

Best For: Wishing to buy the stock at a lower price, or to earn option premium income

When selling a put, the seller is obligated to buy the underlying asset at the strike price if the buyer exercises the option, so the maximum loss equals the strike price minus the premium received.

Note: The above four strategies are for illustrating options profit and loss structures and do not constitute trading advice.

Risk Management in Options Trading

Options trading is leveraged, allowing both potential gains and losses to be magnified. Therefore, establishing robust risk management is crucial.

Understanding What Affects Option Value

Option value is influenced by multiple factors:

Underlying Asset Price: The higher the price, the more valuable a call option (the reverse is true for puts).

Time Decay: As expiration approaches, an option’s time value erodes—a process known as time decay. Even with no adverse move in the underlying asset, the holder may lose out due to time decay.

Volatility: The greater the market’s volatility, the higher the option value, as there is a greater chance of large price swings.

Interest Rate and Dividends: These also affect option prices, but typically to a lesser degree.

Practical Risk Control Tips

Start Small: Beginners should use small amounts to familiarize themselves with options trading before scaling up.

Avoid Overleveraging: Don’t commit all your capital to options trading; maintain a diversified asset allocation.

Choose High-Liquidity Options: Actively traded options usually have higher liquidity and smaller bid-ask spreads, reducing trading costs.

Monitor Expirations: Keep track of option expiration dates and time your decision to exercise, close, or let options expire worthless.

Set Stop-Losses: Set clear stop-losses for each trade to control maximum loss per position.

Important Note: Options trading involves significant risks and may result in the loss of your entire investment. Investors should fully understand all risks and invest based on their personal financial situation and risk tolerance.

How to Start Trading Options

Hong Kong investors looking to trade options need to select a brokerage that offers the relevant services. Longbridge Securities offers U.S. stock options trading, allowing you to trade U.S. options through Longbridge Securities.

Account Opening Preparation

You will need to open a securities account and complete a risk assessment. Because options trading carries higher risk than traditional securities trading, brokerages generally require some investment experience and risk tolerance.

Mastering Platform Features

Understanding how to use your platform's options quotes, order entry, and risk control tools is the bedrock for successful trading. Longbridge Securities’ trading tools provide comprehensive market data and analytics to help you make informed choices.

Continuous Learning and Research

Options trading strategies are diverse and complex. Keep learning about the market, track developments, and gradually strengthen your trading skills. Start with simple long call or long put options, then move on to more complex strategies as you gain experience.

Frequently Asked Questions

How do U.S. stock options differ from Hong Kong stock options?

First, contract size: Standard U.S. stock options contracts cover 100 shares, whereas Hong Kong stock option contract sizes vary by stock. Second, market size and liquidity: U.S. options markets generally offer higher liquidity and more choices. However, both markets offer weekly and monthly expiries, and both Hong Kong stock options and most U.S. stock and ETF options are American-style, exercisable at any time before expiration.

What is the maximum loss when buying options?

The maximum loss is limited to the option premium paid, whether buying calls or puts. This is a key benefit over directly trading assets, as you know your worst-case scenario. For example, if you pay $200 for a call option contract, your maximum loss is $200 regardless of market movement.

When should you exercise an option?

While American-style options may be exercised at any time before expiry, it's not always optimal. Generally, for calls, you may consider exercise if the asset’s price is far above the strike price with expiry soon, or if a large dividend is imminent. For puts, you may exercise if the asset price is well below the strike. However, in most cases, with time value remaining, selling the option on the market is better than exercising, as exercise forfeits the time value. Each case should be evaluated individually.

How much money do you need to start trading options?

Options trading has a relatively low barrier to entry, as the premiums are much less than buying the actual shares covered by the contract. For example, an options contract might cost only a few hundred to a few thousand HKD, much less than buying 100 shares directly. However, beginners should avoid committing all their capital at once—start small and grow as you gain experience, basing your amount on your own finances and risk appetite.

How do you choose a suitable options contract?

Consider several factors: First, select underlying assets you are familiar with and have researched, and decide whether to buy calls or puts based on your outlook. Next, choose a strike price: in-the-money options (calls where the stock price is above the strike, puts where it’s below) cost more but are more likely to be exercised; out-of-the-money options are cheaper but require a bigger move to profit. Third, consider expiry: longer-term options cost more but give you more time. Finally, pick liquid contracts—look for high trading volume and tight spreads to make entry and exit easier.

Summary

Options trading provides Hong Kong investors with a versatile tool that can be applied across different market conditions and investment goals, including leveraged returns, portfolio hedging, or generating extra income.

However, options trading is not for everyone. It requires a solid foundation of knowledge, rigorous risk management, and ongoing research. Start with the basics, build experience step-by-step, and always stick to prudent risk controls. You can learn more about investment strategies through the Longbridge Academy or by downloading the Longbridge App.