We break down what you need to know about options trading in Canada, including how to trade options and some of the best options trading platforms in Canada.
Options trading is investing in the future of the stock market or specific securities like stocks and bonds. Options trading gives you a future choice—but not an obligation—to buy or sell an underlying asset at a specified price by a specified date.
To start trading options in Canada, you’ll need to have a broker, a trading strategy and some form of identification. You may also need to undergo a competency test. Here’s how to trade options in Canada in 5 steps:
You’ll need to sign up to a stock broker that offers options trading. You can compare popular brokers in the table below.
Before signing up you’ll need to decide whether you want to trade Canadian-listed stock options or options from overseas markets such as the United States as many platforms offer one or the other. Although less common, it’s also possible to trade options on other types of securities, such as commodities, indices, futures and forex.
Once you know what you want to trade, you can more easily compare the fees, features and trading tools to find the best brokerage platform for you.
Here are some factors to consider when selecting a platform:
To open an account for option trading in Canada, you’ll need:
To trade options successfully, it’s crucial to have clear investment objectives and a plan in place. Consider what options you want to trade, how much you want to invest, which strategies to use, and your risk tolerance.
Remember that options trading is riskier than passive investing, so it may not be suitable for more conservative investors. Despite the potential for large returns, statistically speaking, trading options is more likely to result in losses.
Knowing your end goal will help to inform which options trading strategy you use, including your entry and exit strategies and the assets you select. For instance, are you hoping to make a profit by speculating on asset price volatility? Do you intend to use options as a hedge against falling stock prices? Do you anticipate an increase in value in a certain sector or asset class? Depending on your goal, you will require very different strategies and planning.
Once you know all this, you can start to decide which assets to focus on and how you’ll be trading them.
Once you’ve decided which company stock or other asset you want to trade (called the underlying asset), you need to select a contract.
Every contract has a different expiration date, strike price and option type, so you’ll need to decide all of these factors when choosing.
The expiration date is the date on which the options contract expires. After this date, the contract is no longer valid and the option either becomes worthless or is exercised by the holder, meaning the underlying asset is bought or sold.
The strike price is the price at which the underlying security can be bought or sold when the option is exercised. This price is predetermined and is stated in the options contract. For example, if you buy a call option with a strike price of US$150 on Apple stock, you have the right to buy Apple stock at US$150 per stock before the expiration date.
Finally, the option type refers to whether you want to buy or sell a call option or a put option. A call option gives you the right (but not the obligation) to buy the underlying security at the strike price, while a put option gives you the right to sell the underlying security at the strike price.
Which contract type you pair with your chosen asset depends on how you think that asset will perform.
Generally speaking, if you think the asset’s price will rise, you should buy a call option or sell a put. Alternatively, if you predict the stock or market price will fall, you should buy a put option (also called shorting) or sell a call option.
Before placing your trade, you’ll need to top up your account with enough funds.
Typically there are a few ways to fund your account, including direct deposit, via a credit card, PayPal or even BPAY.
You can usually fund your account by following the prompts in your broker’s account.
If you’re using leverage, keep in mind that you’ll need enough funds to cover potential losses, which may be greater than your initial trade amount.
There’s also usually a minimum amount required when trading options. This will vary from broker to broker but generally speaking, you’ll need to start with at least US$1,000.
After you’ve chosen your contract and funded your account, it’s time to execute your buy or sell trade.
First, you need to decide on the price at which you want to enter the trade, known as the premium. This is the price you’re willing to pay the seller for the contract or the price you’re willing to accept if selling. It’s influenced by factors such as the current market price of the underlying security, implied volatility, the expiration date and other market factors.
You also need to consider the premium that the market is currently offering for the options contract. This market premium is set by the bid-ask spread, which is the difference between the highest price a buyer is willing to pay for the option (the bid price) and the lowest price a seller is willing to accept (the ask price).
Then there’s the time frame. In traditional trading of assets, you’re looking to buy and hold over the long term. In options, it’s the opposite – the shorter the time, the better. This is because the closer an option gets to its expiry date, the less it is worth. As such, you’re looking for sharp movements of the underlying asset in a short period.
Once you have determined the price, it’s time to place your order. You can choose between a market order or a limit order.
A limit order allows you to set the maximum price you are willing to pay (if buying) or the minimum price you are willing to receive (if selling) for the option. A market order will execute at the current market price, which may result in paying a higher premium than you initially intended due to the bid-ask spread.
An option is an agreement between two parties to enter into a contract that gives the owner the right, but not the obligation, to buy or sell the underlying asset at an agreed-upon strike price before an unspecified date.
Options contracts are derivatives investments, which means you’re exchanging contracts rather than buying and selling physical assets. There’s always an underlying asset attached to the contract, such as stocks or commodities, which is how a price is determined.
You can trade different financial products through options, including the following:
Similar to trading stocks, you’ll profit based on the difference in the contract’s price from the day you enter the contract to its future price.
Options listed on overseas markets, such as the United States, are also possible to trade from Canada, depending on the platform you use.
Which is a better investment: options or stocks? Many investors trade options for the following reasons:
On the downside, option trading is usually much riskier than directly buying or selling stocks. While buying stocks is a relatively simple process, options trading can be complicated and has a greater chance of miscalculation leading to loss.
Options traders also typically use leverage which means they can enter a large trade with a small amount of initial capital. While this can amplify profits, it will also amplify losses if the trade goes against the trader.
While investing in the stock market directly is suitable for investors of any level of experience, options trading is best suited to more experienced traders.
The two main participants in an options contract are the “buyer,” who is the person that purchases the contract, and the seller of the contract dubbed the “writer.”
There are two types of options that you can either buy or write. A call option gives its buyer the choice to purchase stocks from its writer at a specific price (the “strike price”) before a set time (the “expiry date”). A put option is the opposite, where the buyer enters a contract to sell the stocks to the writer at a set price within a specific time frame.
The buyer of a call option is hoping that the underlying stocks will rise in price, while the put option buyer is betting that prices will fall. The writers of the contract are hoping for the opposite.
Remember that the buyer of the contract has the right to buy or sell the underlying stock as laid out in the contract (called exercising) but is not actually required to do so.
If the option is not exercised, it will expire worthless on the expiration date. If the option is exercised, the buyer of the option will either buy or sell the underlying asset at the agreed-upon price. If the trader is holding a short option position that is exercised, they will need to fulfill the obligation to buy or sell the underlying asset.
If a trader buys a call option on a stock with a strike price of $50 and the stock price rises to $60, the trader can exercise the option and buy the stock at $50, then sell it at the market price of $60, realizing a profit of $10 per stock.
The two main types of options contracts are call options and put options.
Buying call options gives you the right to buy an asset at a predetermined price within a specific time frame. Selling call options obligates you to sell your assets to the buyer of the option if they exercised their option.
Day traders often use call options to control multiple stocks with a low amount of money.
Options trading example: Call options:
Buying put options gives you the right to sell an asset at a predetermined price within a specific time frame. These are the opposite of call options.
Put options are often used to insure your investment.
Options trading example: Put options:
There are two main styles of options contracts: American style and European style options. While American-style options are more common around the world, both types of contracts tend to exist in any one market.
There are also other less common styles of options contracts, including:
It’s important to understand the different styles of option contracts because the style can impact the price and the timing of when the option can be exercised, which can affect the potential profitability of the trade.
If you trade options, you’ll face a number of different fees, depending on what you trade and where you trade them.
Keep an eye out for:
Many of these fees are a fraction of a cent, but given you will be charged them, it is best to take note of what you’re paying to the broker.
Options trading isn’t suitable for everyone and has the following drawbacks to keep in mind.
Options trading comes with rewards and opportunities, but it also has increasing risks and it can be difficult for newer investors to grasp the concepts behind them.
While options trading gives you the right but not the obligation to own the underlying asset, you are trading with leverage, which should be left to sophisticated investors.
Steps to owning and managing Yoshitsu Co. stocks, with 24-hour and historical pricing before you buy.
Steps to owning and managing Cerberus Cyber Sentinel stocks, with 24-hour and historical pricing before you buy.
Steps to owning and managing Fresh Vine Wine, Inc stocks, with 24-hour and historical pricing before you buy.
Steps to owning and managing DGX with 24-hour and historical pricing before you buy.
Everything we know about the Nuvectis Pharma IPO plus information on how to buy in.
Steps to owning and managing BuzzFeed, Inc stocks, with 24-hour and historical pricing before you buy.
These are the best renewable energy stocks to buy now in Canada.
A failed SPAC deal pulled the plug on this vertical farming company’s plans to go public. But you can buy stock in other sustainable farming companies.
Everything we know about the Reddit IPO plus information on how to buy in.
Find out how to invest in the S&P 500 in Canada—one of the world’s most popular stock indices—to diversify your portfolio.