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How to trade options in Canada

Is options trading better than stocks? Find out how option trading in Canada works.

What is options trading? Is trading options better than stocks? Option trading can let you earn income in down markets, protect your portfolio in volatile markets or capitalize on future price movements of securities.

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.

What is options trading?

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.

Options trading in Canada in 5 easy steps

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:

  1. Find an options trading platform
  2. Create an investments plan
  3. Select your options contract
  4. Fund your account
  5. Place your trade

1. Find an options trading platform

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.

Compare options trading platforms

1 - 6 of 6
Name Product Finder Rating Available Asset Types Stock Trading Fee Account Fee Signup Offer Table description
Interactive Brokers
Finder Score:
★★★★★
4.2 / 5
Stocks, Bonds, Options, Index Funds, ETFs, Currencies, Futures
min $1.00, max 0.5%
$0
N/A
Winner for Best Overall Broker in the Finder Stock Trading Platform Awards.
Moomoo Financial Canada
Finder Score:
★★★★★
3.9 / 5
Stocks, Options, ETFs
$0.014/stock
$0
Get up to $1,300 or a $1,200 Apple gift card
Trade US stocks for up to 90% less and access free real time stock quotes and level 2 market data. T&C's Apply.
CIBC Investor's Edge
Finder Score:
★★★★★
3.7 / 5
Stocks, Bonds, Options, Mutual Funds, ETFs
$6.95
$0 if conditions met, or $100
100 free trades + up to $4,500 cash back
An easy-to-use platform with access to a variety of tools to help you trade with confidence.
RBC Direct Investing
Finder Score:
★★★★★
3.8 / 5
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs
$6.95 - $9.95
$0 if conditions met, otherwise $25/quarter
N/A
Enjoy no minimum trading activity requirements and pay just $9.95 per trade or $6.95 if making 150 trades per quarter.
Questrade
Finder Score:
★★★★★
3.9 / 5
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs, International Equities, Precious Metals
$4.95 - $9.95
$0
Get $50 in free trades when you fund your account with a minimum of $1,000.
Opt for self-directed investing and save on fees or get a pre-built portfolio to take out some of the guesswork.
Qtrade Direct Investing
Finder Score:
★★★★★
3.6 / 5
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs
$6.95 - $8.75
$0 if conditions met, otherwise $25/quarter
Get up to a $150 sign-up bonus. Use code OFFER2024. Ends October 31, 2024.
Low trading commissions and an easy-to-use platform with access to powerful tools and a wide selection of investment options.
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How do I compare options trading platforms?

Here are some factors to consider when selecting a platform:

  1. Fees: Find an options broker that offers low commissions and contract fees.
  2. Markets: Ensure that the platform has access to the markets you’re interested in trading. For instance, some brokers offer US stock options and others feature options listed in other overseas markets.
  3. Assets: Make sure the platform offers the assets you want to trade options with, such as stocks, indexes, commodities, futures and ETFs.
  4. Educational Resources: Look for a platform that provides educational resources, such as webinars and articles, to improve your trading skills.
  5. Security: Check that the platform is authorised by your local regulator, has a solid track record and has robust security measures in place to protect your personal and financial information.
  6. Customer Support: Choose a platform with responsive customer support that can assist you with any trading-related issues.
  7. User Interface: Choose a platform with an intuitive and user-friendly interface to save time and prevent confusion when trading options.

Information you’ll need to open an options trading account

To open an account for option trading in Canada, you’ll need:

  • Be a resident of Canada and be at least the age of majority in your province or territory (18 or 19 years old).
  • Have basic information with you. The broker will usually ask you to prove who you are before signing up.
  • Be able to pass an options trading assessment. Before you can trade options, you’ll need to show the broker you have some understanding of how they work.

2. Create an investments plan

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.

3. Select your options contract

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.

Key terms for option trading

  • Call option (“call”): Gives you the right, but not obligation, to buy an asset at a specific price by a certain date.
  • Put option (“put”): Gives you the right, but not obligation, to sell an asset at a specific price by a certain date.
  • Strike price: Price at which an option can be exercised.
  • Market price: Current buying or selling price of an asset.
  • Options spread: A single transaction involving the execution of multiple contracts with different strike prices.

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.

4. Fund your account

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.

5. Place your trade

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).

Did you know?
The strike price of an option is the price you can buy or sell the underlying security, at the time when the option is exercised. It does not change. Meanwhile, the spot price is the current market price of the underlying asset

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.

What is an option?

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.

Options vs stocks

Which is a better investment: options or stocks? Many investors trade options for the following reasons:

  • Options can amplify profits using leverage
  • They can protect stocks from loss
  • They can provide extra income from stocks
  • They allow you to speculate/make money in a falling market
  • They can be a lower-cost way to invest
  • They allow investors to have more flexible or complex strategies

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.

How does options trading work?

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.

Options trading example

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.

Types of options

The two main types of options contracts are call options and put options.

Call 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:

  1. Company X stocks currently trade at $100 per stock. That’s expensive for you, but you believe the stock price will move higher and you can turn a profit.
  2. You buy 1 call option, which is the right to buy 100 stocks of the company at an agreed-upon price $100 per stock). To buy this options contract, you pay a premium of $500 ($5 x 100 stocks). With a $500 investment, you control 100 stocks worth $10,000.
  3. A week later, the stock price climbs to $120 per stock. To exercise the option, you would need to have $10,000 in your account to buy the 100 stocks at the agreed-upon price of $100 each.
  4. Instead of buying the stocks, you sell the options contract to another trader for a higher price than what you paid and pocket the difference between the premium you paid for the option and the price for which you sold it on the market.

Put 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:

  1. Suppose you buy 100 stocks of Company X at $100 per stock. That’s $10,000 invested. You believe the stock price will continue higher, but there’s economic news that may negatively affect your stock price.
  2. To protect your investment, you buy a put option contract for $500. That’s 100 stocks x $5 premium per stock, an arbitrary number as the premium varies depending on multiple factors.
  3. One put option contract gives you the right to sell 100 stocks at an agreed-upon price until a specific date. In this case, let’s say the agreed-upon price is $100 per stock and the expiration date is 30 days later.
  4. The stock price starts to drop. By the time the contract reaches the expiry date, Company X stocks are worth $70 apiece. Without the options contract, you could have lost $3,000 (100 stocks x $30).
  5. Luckily, you bought the put option and decided to exercise it. You sell your 100 stocks for $100 each – the agreed-upon price in the contract – instead of the market price of $70.
  6. In this scenario, you’re $500 down for the premium you paid to buy the options contract instead of $3,000. Much better.

American vs. European 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.

  • American style options: American style options can be exercised by the buyer at any time prior to the expiration date. This gives the buyer more flexibility in terms of when they can choose to exercise their option.
  • European style options: European style options can only be exercised by the buyer on the expiration date. This means the buyer has less flexibility in terms of when they can choose to exercise their option.

There are also other less common styles of options contracts, including:

  • Bermuda style options: Bermuda style options can be exercised at certain specified dates prior to the expiration date. This gives the buyer some flexibility in terms of when they can choose to exercise their option.
  • Asian style options: Asian style options are settled based on the average price of the underlying asset over a specified period rather than the price at the expiration date.

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.

How much does options trading cost?

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:

  • Broker commissions: These are basically paying for a trade to be executed or any investment advice. Depending on the broker, sometimes these fees are waived.
  • Contract fee: Charged by brokers when an options contract is exercised or assigned. This fee is typically charged per contract and can vary depending on the broker and the exchange where the option is traded.
  • Platform fees: You can be charged numerous fees for using the trading platform.
  • Pass-through fees: Options regulatory fees, SEC membership fees, FINRA trading activity fees, OCC clearing fees
  • Exchange fees: These fees are usually charged when you trade using a foreign currency. You will pay a small percentage to transfer into and out of the foreign currency.

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 risks and disadvantages

Options trading isn’t suitable for everyone and has the following drawbacks to keep in mind.

  • Market volatility: Options trading can be particularly risky in volatile markets, where sudden price movements can lead to significant losses or gains. Even if the underlying asset moves in the direction predicted, volatility can result in the option expiring out of the money, which means it loses its value.
  • It’s hard to get the price right at the exact time. With options trading, you’re not only betting on the stock price – you’re betting on the stock price at a specific time. You may be right that the stock price will rise or fall, but being correct about when is hard.
  • The premium is non-refundable. When you buy an options contract, the premium you pay goes to the seller of that contract. That’s how you pay the other side to take your risk. Whether you’re right about the stock price or not, the premium you pay is non-refundable.
  • You’ll likely pay a fee. Most brokers charge fees for options trading. This fee is often typically less than $1.50 per contract. You may also pay up to $19 for an options exercise fee.
  • Leverage: Options trading involves leverage, which means that traders can control a large amount of the underlying asset for a relatively small upfront investment. While leverage can amplify profits, it can also amplify losses.
  • Complexity: Options trading can be complex. Traders need to understand the various strategies and trading techniques to be successful. A lack of understanding can lead to mistakes and losses.

Bottom line

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.

  • Options trading is the process of buying and selling options contracts.
  • Option trading gives the buyer the right – but not the obligation – to buy or sell an asset.
  • You can compare online brokers to begin options trading.

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