What are Options?

Options are versatile financial instruments that are derivatives that derive their value from an underlying security such as a stock. These derivatives can help to enable investors (Speculators and Hedgers) to potentially benefit from price movements in financial markets.

An option is a contract between two parties that grants the buyer the right, but not the obligation, to buy or sell an underlying security at a predetermined price within a specified timeframe.

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How Options Work

When you purchase an option, you are buying the right to make a decision about the underlying asset at a later date. The seller of the option (also called the Writer) has the obligation to fulfil the contract if the buyer (referred to as the Taker) chooses to exercise their right but not obligation

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Type of Options

There are two main types of options (where several other options strategies can derive from) these are:

•Call Options: These prov ide the buyer with the right to purchase a stock at a specific price (known as the strike price) before or on the expiration date. If the buyer exercises the option, the seller is obligated to sell the stock at the agreed strike price.

•Put Options: These pro vide the buyer with the right to sell a stock at a specific price (the strike price) before or on the expiration date. If the buyer exercises the option, the seller is obligated to purchase the stock at the agreed strike price.

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What to know about an Option Order?

When placing an option order, you will need to specify several key components:

• Side: Select whether you want to buy (long) or sell (short) the options contract.

• Underlying Asset: This is the security that the options contract is based on, such as shares, indices, or ETFs. The contract gives you exposure to price movements in this underlying asset. Generally, as trading volume and interest increase in popular stocks and indices, options trading activity for those securities tends to increase correspondingly.

• Expiration Date: The date when the options contract expires and all associated rights and obligations cease to exist. Options are available with various expiration timeframes including weekly, monthly, quarterly, and yearly expirations.

• Strike Price : The predetermined price at which you have the right to buy (for calls) or sell (for puts) the underlying asset if you choose to exercise the contract.

• Contract Type: Specify whether you want to trade a call option (right to buy) or put option (right to sell).

• Price: The premium you are willing to pay (when buying) or receive (when selling) for each options contract. This can be set as a market order, limit order, or other order types depending on your trading strategy.

• Quantity: The number of options contracts you wish to trade.

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Option difference by underlying assets

Equity Options

These options are based on individual shares or ETFs , such as TSLA, NVDA, and SPY. Each standard equity option contract controls 100 shares of the underlying stock. For example, when you buy 1 Tesla option contract, you control 100 Tesla shares. Most US equity options are American style, meaning you can exercise them any time before they expire.

Index Options

These options track market indexes, such as SPX , NDX and VIX. Index options are cash-settled because you cannot buy or sell the actual index. Each index option contract represents the index value multiplied by a set dollar amount(called Multiplier). For example, one SPX option has a $100 multiplier. If the SPX index moves up 1 point, your contract value increases by $100. Most US index options are European style, meaning you can only exercise them on the expiration date.

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How an Option Premium is Defined:

An option premium is the price you pay to purchase an option contract or the amount you receive when you sell one. It represents the market value of the option at any given time.

The option premium consists of two main components:

1. Intrinsic Value
This is the real, immediate value of the option if you exercised it right now.

• For call options: Current stock price minus strike price (if positive)
• For put options: Strike price minus current stock price (if positive)
• If the calculation is negative, the intrinsic value is zero

Example: If ABC shares trade at $105 and you own a $100 call option, the intrinsic value is $5 ($105 - $100 = $5).

2. Time Value
This represents the potential for the option to become more valuable before expiration. More time typically means higher premiums. Time value decreases as the expiration date approaches.

3. Additional factors that influence premium:

• Implied volatility- The market's expectation of how much the underlying asset's price will move over the life of the option. Higher implied volatility increases option premiums.
• Interest rates- Higher interest rates typically increase call premiums because the cost of carrying the underlying asset is higher. Higher interest rates typically decrease put premiums due to the present value effect of receiving the strike price
• Dividends- Expected dividends typically decrease call premiums because the stock price usually drops by the dividend amount on the ex-dividend date. Expected dividends typically increase put premiums for the same reason.

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What Happens at Expiration, Exercise, and Assignment?

After you buy or sell an option, the following may happen:

Expiration:

Options contracts have specific expiration dates. At expiration:

• Out-of-the-money (‘OTM’) options may expire worthless on the stated expiration date regardless.
• At-the-money (‘ATM’) options may expire worthless on the stated expiration date regardless.
• In-the-money (‘ITM’) options are typically automatically exercised by your broker if you have sufficient cash or securities.

Example: You believe that the price of ABC shares is likely to rise so you buy an ABC Call option with a strike price of $100 for a premium of $0.50. At expiration, if ABC shares are priced at $98 (less than the strike price), your option will expire worthless, meaning that you no longer have the right to buy ABC shares at $100 and you will not recover the $0.50 premium spent. If ABC trades at $102, the option will likely be auto-exercised.

Exercise

Exercise occurs when you choose to use your rights under the option contract before or at expiration.

Call Options (Right to Buy)

• When to exercise: Market price is higher than your strike price
• What happens: You buy 100 shares per contract at the strike price
• Requirement: You need enough money in your account to purchase the shares

Example: If you have a call option with a $50 strike price and the market price is $55, you can buy shares for $50 each (saving $5 per share).

Put Options (Right to Sell)

• When to exercise: Market price is lower than your strike price
• What happens: You sell 100 shares per contract at the strike price
• Requirement: You must own the shares, or your broker may purchase them at current market price first

Example: If you have a put option with a $50 strike price and the market price is $45, you can sell shares for $50 each (gaining $5 per share above market value).

Assignment

Assignment happens to option sellers when the buyer exercises their option. You cannot control when assignment occurs. To ensure the assignment risk is covered, most brokers request a cash collateral or stock collateral while you short a options.

Call Assignment (You Sold a Call)

• What you must do: Sell 100 shares per contract at the strike price
• If you do not own the shares: You will have a short position

Example: You sold a call option with a $50 strike price and received $200 premium. If assigned, you must sell 100 shares at $50 each, regardless of the current market price.

Put Assignment (You Sold a Put)

• What you must do: Buy 100 shares per contract at the strike price
• You need sufficient funds in your account to purchase the shares

Example: You sold a put option with a $50 strike price and received $150 premium. If assigned, you must buy 100 shares at $50 each, regardless of the current market price.

To protect against assignment risk, most brokers require collateral when you sell options. For example, a Cash Secured Put strategy requires you to hold enough money in your account to purchase 100 shares at the strike price, while a Covered Call strategy requires you to hold the actual shares in your account to deliver if assigned.

Basic Options Trading Profits and Risks

In options trading, your potential profits and risks depe nd on whether you buy or sell options:

· Long Call Options: Unlimited profit potential if the stock price rises above your strike price plus premium paid. Risk limited to the premium you paid.

· Long Put Options: High profit potential if the stock price falls below your strike price minus premium paid. Risk limited to the premium you paid.

· Short Call Options: Profit limited to the premium you collect if the stock stays below strike price. Unlimited risk - substantial losses possible if stock price rises significantly.

· Short Put Options: Profit limited to the premium you collect if the stock stays above strike price. Significant risk - substantial losses possible if stock price falls dramatically.

Once you become familiar with basic options trading, you may progress to more sophisticated combination strategies. These involve trading multiple options contracts with the same underlying asset but using different strike prices or expiration dates. Each combination strategy creates a unique risk and reward profile, allowing you to align your trading approach with your market expectations and risk tolerance.

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What are the basic option strategies for your portfolio?

· Long Call : Purchase call options when you are bullish on a stock but want to limit your capital exposure. This strategy allows you to participate in potential upside gains with a smaller initial investment.

· Long Put : Purchase put options when you are bearish on a stock. Use this approach to protect your portfolio from downside risk or to profit from a decline in stock prices.

· Covered Call : Sell call options on stocks you already own. This strategy generates premium income and may result in selling your shares at a higher predetermined price if the option is exercised.

· Cash-Secured Put : Sell put options while maintaining enough cash to purchase the underlying shares if assigned. This generates income through option premiums and creates an opportunity to acquire stocks at a more attractive entry price.

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What are 0DTE Options?

0DTE stands for Zero Days to Expiration. These are options contracts that expire on the very same day they are traded. For popular assets like the S&P 500 (SPX or SPY) and the Nasdaq 100 (QQQ), there are now options expiring every single trading day.

Key Risks to Watch Out For

· The Clock is Ticking: Because the option expires in hours or minutes, its "time value" (Theta) disappears almost instantly. If the stock doesn't move in your direction quickly, the option’s price will drop toward zero.

· Extreme Leverage: Because they have so little time left, 0DTE options are very cheap compared to monthly options. This allows traders to control a large amount of stock for a very small amount of money, which can lead to massive percentage gains—or a total loss of the investment.

· Auto Liquidation: most brokers have auto-liquidation policies for 0DTE options to prevent exercise risk. If you hold a position that is In-The-Money (ITM) or near-the-money as the market close approaches(typically 0.5-1 hours before expiration), and your account does not have enough cash or buying power to actually buy the underlying shares, the broker will often step in and close the trade for you.

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How to start trading options on Webull

Step 1: Open the Webull app on your mobile device or desktop

Step 2: Navigate to Settings > Manage Brokerage Account

Step 3: Apply for Options Trading and complete the required options assessment questionnaire

How to place an order?

Step 1: Choose Your Asset: Select a stock, ETF, or index from the Webull platform that you want to trade options on.

Step 2: Pick Your Strategy: Decide between call options (if you expect prices to rise) or put options (if you expect prices to fall).

Step 3: Set Strike Price and Expiry Date: Choose the strike price and when you want your options contract to expire.

Step 4: Buy or Sell: Decide whether to buy an option (opening a position) or sell an option (if you already own one).

Step 5: Manage Your Position: Monitor your options and choose to close, exercise, or let them expire based on market performance.