A person has a lot of choices to choose from when it pertains to trading options and securities in Canada. This is because the market makes available a lot of financial products that can help a person to customize his investment strategy.
Options just like every other investment are risky and highly speculative. So, it is advised that one should invest what he can bear if it’s lost and with platforms with lesser risks and more profit.
What is Trading Options?
Trading options are contractual agreements that grant the bearer, rights without obligation (unlike a standard contract in which every right comes with its obligations ) to buy or sell an amount of some underlying asset at a pre-determined price on or before the expiration of the contractual agreement.
This can enhance a person’s portfolio and this is done through added income, protection, and even leverage. Options can be bought just as the other asset classes, are bought with brokerage investment accounts.
A widely known example of this is the use of options as an effective hedge against a declining stock market to limit downside losses.
They can also be used for the generation of reoccurring income and for speculative purposes such as wagering on the direction of a stock. Just like in any other business trade, it’s not always a fun activity.
Options trading also comes with its own risks which any investor should be conversant with before making a trade, being the reason brokers always add disclaimers in their speeches.
How does the Canadian Option Work?
There are two basic styles of options, the American option, and the European option.
Some brokers have said that options in Canada are the American style. This is because just like Asia is a continent where China can be found, America here is used in its adjective form because it is not restricted to only the USA but includes Canada.
These styles are not necessarily about the region but these styles refer to the exercise time of the options i.e European options can only be exercised on expiry date while American options can be exercised anytime until the expiry date and have nothing to do with the region of the underlying instrument.
Just as said above, listed trading options on Canadian stocks will be American. However, options on the indices (such as on the S&P/TSX 60) are European style.
Trading Canadian stock options can be a source of generating a lot of brokerage commissions, which is the reason some young, aggressive brokers recommend them for their clients. That’s despite increased trailer-fee disclosure and Canada’s full implementation of other disclosure requirements for the industry.
An option is a contract between a buyer and a seller that is based on an underlying security, usually a stock. The buyer pays the seller a fee, or premium, for certain rights to the stock. In exchange for the premium, the seller assumes certain obligations.
Options trade through stock exchanges, and each options contract is for 100 shares of a particular company. So one contract quoted at $5 will cost you $500 (before commissions).
Each contract has an expiration date, which gives it a limited life span (usually less than nine months). The strike price (or exercise price), is the price at which buyers can exercise their rights under the contract.
There are two types of options:
- Calls give the holder or buyer the right to buy the underlying security at a specified strike price until the expiration date. The seller of the call has the obligation to sell or deliver the underlying security at the strike price until the expiry date, if the option holder exercises the option.
- Puts grant the holder or buyer the right to sell the underlying security at the strike price until the expiry date. In turn, the seller or writer of the put has the obligation to buy or take delivery of the underlying security until expiration, if the option holder exercises the option.
How to Trade options in Canada
In Canada, securities can pass as eligible if it’s listed on a Canadian stock exchange and their market capitalization is within the top 25th percentile of securities listed on Canadian exchanges.
This is because trading options are highly risky and speculative, a person should not invest just because he can. Some of the necessary steps include
- Decision on the amount of money to trade with. This could be as much money as the broker requires opening an account which usually falls within the range of $2000. When it comes to making these decision one has to put into consideration, the significant risk involved. This means that whatever amount used should be an amount that can be forfeited.
- Choose a broker that trades options. In choosing a broker the investor chooses one with favorable conditions which include: one with lots of choices, less expensive commission fees and good/solid reputation. In the situation of doubt, one can check with the securities regulator to confirm these conditions. These security regulators can be found in each province and territory of Canada.
- Select an options trading strategy. when trading in any form of investment platform. Strategy is required . One should not buy because he feels that he should instead, strategies that are clear should be in place to plan what to buy and sell and to also plan when to buy and sell. Studying of price moments on Bloomberg or renter it’s advised.
- Practice with a demo account to ameliorate the impact of the loss that might be caused by an amateur knowledge of the trade this is because though the demo account seems real, the money is not real.
- Start trading with a life account and in doing so it is advisable t start small. To taste your ability Make a few minimal purchases.The best traders Make informed, emotionless decisions.
What are the factors to consider when Predicting Trading Options in Canada?
Some of these factors to be considered during prediction include; price rises and falls.
Trading options are risky and this is majorly the reason why you are advised to trade with highly experienced stock traders to make your speculation hinge much easier.
Usually, a trader speculates whether there will be a rise or fall in the stock’s price and this determines what option a trader finally chooses. If he goes for the call option, it means he is hoping on the rise of stock price thereby choosing to buy the stock at a high price.
If he opts for the latter which is the put option, he would have speculated a decline in a stock price thereby choosing to sell off at a later time and specific price.
How do the Canadian Stock Options cost you Money?
The following ways are how a Canadian trading option can make you spend money.
For an option trader to make money with Canadian stock options, he has to correctly predict the direction of a stock’s price. If the options trader buys a call option, it means that the betting price will rise.
But, with a put option, his bet is definitely a price fall.
The expiration of options makes it valueless, and this means that an option holder must not only predict the direction of both the price change in the underlying interest and the magnitude of the move, but also about when the price change will occur.
The option trader will lose all, or a very large part of his investment in the option if the price of the interest does not go far enough in the predicted direction before the expiration of the option.
High Costs of Trading
While trading options, you will pay commissions each time you buy or sell stock options. A larger part of the profits gotten from the stock options is consumed by commissions.
This is particularly where trading is made in small quantities.
Where the options trader is right in the prediction of the direction of the stock price, he also must be able to predict the minimum amount that a stock will move.
If the stock moves up or down by only a small amount before it expires, he will still lose money.
An option is different from a common stock and so has a limited lifespan. In the case of common trade and having the hope that their value may rise, an options trader may hold common stock for an undefined time.
A stockholder May choose to hold on and wait out a temporary downturn hoping that he may realize a profit but when it comes to option trading, every option has an expiration date that is, if it is not disposed of and this is the reason, an option is seen as a “wasting asset.
”A portion of the price an options trader pays for an option is chiefly for “time “ and as each day passes he loses more of this “time” premium. An options trader has to predict correctly in three different ways: the price direction, the magnitude of price change, and the time frame. This is to affect how to make a better profit in the Canadian stock option.
It doesn’t Grant Ownership Rights
Bearing in mind that whenever an underlying stock splits, the contracts that concern options on that stock also split. It is important to know that options traders participate only in possible benefits of the movement of the stock’s price, unlike stock ownership which gives a holder a share of the company, rights to dividends, and rights to vote.
High risk of Total Loss
Generally, Stocks can in some cases become worthless and when it comes to option trading, an options trader is put in a situation where he runs a much greater risk of losing the whole sum paid for the option in a somewhat short period of time.
This goes further to reflect the highly risky nature of an option as a wasting asset that is worthless once it is time for its expiration. If the option stock is not sold before it expires then the option trader will his entire investment in the option.
Resources for Learning to Trade Option
Options can be attractive even as it has associated risks. It is true that trade options have the potential to deliver high returns, and can also be a growing business that gains new stock due to its cost-effective strategy. It also reduces losses in situations where the stock’s prices start to drop but this does not change the fact that entering an options trade is not to be done unprepared.
An options trader should start by reading as much as he can afford to about options through books, websites, blogs, more books, more websites, more blogs. The reading stage first will help him get used to the strategies.
Some of these sources are companies like Charles Schwab which has options trading resources available to their clients, and Fidelity which also has an options strategy guide that has helped and still helps an options trader learn about different strategies one can succeed within options trading.
There are also free online resources such as Option Alpha or TastyTrade. In situations where the options trader is working with the help of a brokerage specializing in options trading, he should be given directions to educational tools.
Best Trading Options Platforms in Canada.
An options trader may be faced with the question of which platforms to do his options trading with because there are lots of them in these current times and these are some of the best platforms
Qtrade is a platform that can be operated in two forms they are the trading website and the trading mobile app. One should be careful not to mistake it for another platform bearing Questrade and an advanced trading platform is not an option here.
The website is known for its intuitive nature and its ability to make trading easy. On the other hand, several reviews have given it a 2.4 out of 5-star rating on both forms because the app is not fast, makes logging in a herculean task and the interface is clumsy.
To trade on this platform, there is no specified minimum amount required to start investing, and an options trader can sign up for a practice account.
It has four platforms and offers trading on all its four platforms which are;
- Questrade trading ie: its website which can also be called a desktop platform
- Questrade app
- Questrade IQ Edge
- Questrade Global
Because these platforms are less complicated and easy to trade on, amateurs and beginners are advised to trade with it and on the app.
On the contrary, this app does not have the best reviews and has a low star rating both on the App Store and Google Play. According to users, the app is either buggy, slow, or freezing on them.
Options trading commissions are $9.95 per trade plus $1 per contract. So, traders who are active usually pay $4.95 per trade plus $0.75 per contract in a situation where the trader has chosen a fixed plan or $6.95 per trade plus $0.75 per contract where he has chosen a variable plan.
#3. TD Direct Investing
TD Direct Investing just like some platforms offers options trading on four different platforms;
- WebBroker (the regular website),
- TD app
- Advanced Dashboard
- Think or swim
For learners and beginners alike, WebBroker and the app are said to be the easiest way to get started. The think or swim platform is one mostly for the U.S. and it is recommended for both trading and banking and has fairly good reviews on both the App Store and google play.
The standard commission for options trading is $9.99 per trade plus $1.25 per contract. Actively trading persons pay $7 per trade plus $1.25 per contract. Commissions are the same for trades made on American exchanges except trades made in U.S. dollars.
There is no set minimum amount to invest and there are investment education resources as well as live and on-demand webinars available for free even to non-clients.
#4. Interactive Brokers
Interactive Brokers has three trading platforms;
- Client Portal (its website)
- Trader Workstation
- IBKR Mobile (its app)
Beginners should use the Interactive Brokers Client Portal or the app.
The website is not difficult to use and making a trade is easy. It also has fairly good reviews on the App Store and on Google Play.
Commissions are lower compared to other competing platforms. They start at $1.25 per contract with a minimum $1.50 charge per order for less than 10,000 trades per month.
The commission is $1.15 per contract for 10,001 to 50,000 trades a month, $1.05 per contract for 50,001 to 100,000 trades per month, and $1 per contract when an option trader makes more than 100,000 trades a month.
But, with the existence of a minimum charge of $1.50. To trade on American exchanges, the commissions are USD $0.25 to $0.65 per contract, depending on the option’s price for less than 10,000 trades a month.
The minimum charge is USD $1. With this platform, the more you can get it to contracts an option trade trades the lower the commissions he has to pay and they can be as low as $0.15 when he trades more than 100,000 contracts a month.
#5. Web-based Power E*TRADE
These platforms offer all the necessary tools and options traders would need. details like;
- Automatic spread groupings
- Effortless scanning through StrategySEEK
- Easy-to-understand risk data through tradeLAB generally make the use of Power E*TRADE a gratifying experience
From a number of platforms mentioned, one can recommend the Power E*TRADE platform especially for beginners and this is because it is somewhat easy to use with its education and intuitive design.
This can be exemplified using the Snapshot Analysis tool which does not only end with risk-and reward translated with smiley faces for each options trade but also show key market events to look out for and these events are listed alongside a P&L chart.
When it comes later the part of the professionals, Interactive Brokers takes the lead as the most recommended options platform. This is because, with Interactive Brokers, there is an absence base charge with the per-contract rate of $.70. Additional savings are made with more frequent trading.