Recently, some people have asked me what options are, so I decided to organize this topic. Actually, many people misunderstand options—they think they’re just tools for gambling. But if you use them the right way, they can be a fairly flexible investment approach.

Let’s start with the core concept. Options—also called options contracts—basically mean that the buyer has the right, in the future, to buy or sell a certain asset at a predetermined agreed-upon price. This asset can be stocks, currencies, indices, or even commodities. Why use options? The biggest advantage is that you can control large assets with a small cost: you only need to pay a small amount of margin to enjoy this right.

More importantly, options can find opportunities in any market environment. There are ways to use them in a bull market, in a bear market, and even when the market is moving sideways. If you think the price will rise, buy call options; if you think it will fall, buy put options. You can also use them to hedge the risks of other assets you hold. For example, if you hold stocks but worry about a decline, you can buy put options to protect yourself.

However, note that while the concept of options is not complicated, before trading, the broker must approve your account. You need to fill out the options agreement so they can assess your financial situation, trading experience, and your level of knowledge. This is not a joke.

Let’s look at the four basic ways to trade. Buying call options is like buying a discount coupon—if the stock goes up, you profit; if it goes down, your loss is limited to the option premium. Buying put options works the opposite way: if the stock goes down, you make money; if it goes up, you only lose the option premium. But selling options is dangerous—especially selling call or put options, because the risk can be amplified infinitely. Here’s a vivid example: if you sell a put option with a strike price of $160, and the stock drops to zero, you have to buy the worthless stock at $160. Your loss could be as high as $15,639, while the option premium you earned from selling it is only $361. This is what’s called “win the sugar, lose the whole mill”—a small gain with potentially a massive loss.

How do you reduce risk? Four key points: avoid net short options positions, control your position size, diversify your investments, and use stop-loss orders. Most importantly, don’t sell too many options, because losses can be unlimited. If you use multiple options combination strategies, make sure the number of contracts you buy is not less than the number you sell—then you’ll know the maximum you can lose. Controlling position size is also crucial: don’t put all your money into a single underlying asset.

By the way, options, futures, and contracts for difference each have their own characteristics. Options are complex but flexible; futures require both parties to perform the contract; and CFDs are the simplest to operate but have the highest leverage. If you want to capture short-term opportunities and you have a strong ability to tolerate risk, CFDs or futures may be more direct. But no matter which tool you choose, doing solid investment research is the real foundation—no tool can work well unless your view is correct.