A stock option is a financial contract based on single underlying stock which is traded on the stock exchange (SEHK) and cleared through its clearing house (SEOCH) for settlement. There are two types of options:

• Buyer has the right but not an obligation to buy a fixed number of shares of the underlying stock at the fixed strike price (i.e. pre-determined price) at any time on or before its expiry daydate.
• Seller has an obligation to sell a fixed number of shares of theunderlying stock at the fixed strike price upon exercise on or before its expiry date.

• Buyer has the right but not an obligation to sell a fixed number of shares of the underlying stock at the fixed strike price at any time on or before its expiry date.
• Seller has an obligation to buy a fixed number of shares of the underlying stock at the fixed strike price upon exercise on or before its expiry date.

The cost of an option is option premium, which is quoted on a per share basis. The buyer of a stock option pays the option premium, the loss of the buyer is limited to the premium he pays while the seller receives the option premium , the loss of the seller may be for an unlimited amount (margin requirements apply to stock option sellers).

• Cost of capital reduction, e.g. long call as a trading substitute for its underlying stock
• Speculation, e.g. leverage trading by long call or long put
• Hedging market risk, e.g. long put for protection on the downside to lock in a positio
• Yield enhancement, e.g. short call to receive the premium
• Lock-in account profits, e.g. long put to lock in the account profit of the underlying stock
• Setting a stock purchase price, e.g. short put to target stock purchase at the strike price
• Meeting diversification needs, e.g. options combination trades in stagnant markets
• Arbitrage, e.g. options combination trades to profit from pricing discrepancy

Please refer to the HKEX website: https://www.hkex.com.hk/Products/Listed-Derivatives/Single-Stock/Stock-Options/Options-Education?sc_lang=en-US