Many people find options trading Canada a bit overwhelming when they first look into it but once you know a few key ideas, you’ll find it easy to understand. Usually, investor portfolios are constructed with many types of asset.
These can be ETFs, bonds, stocks or mutual funds. Options are also an asset class and they have lots of advantages when correctly used that ETFs and tradings stocks don’t have.
What are Options?
Essentially, Options are like a contract that gives the holder the right to buy or sell an underlying asset. While having the right to do this, the bearer doesn’t have to.
The price is pre-determined and they have the right until the contract expires. You can buy Options like other assets via brokerage investment accounts.
Best Options Trading Brokers in Canada
|Forex Brokers||Min. Deposit||Platforms||Rating||Secure Link|
VPS, API, Mobile app
|5/5||Visit Site BlackBull Markets|
Mobile app, DupliTrade
|4.9/5||Visit Site Fusion Markets|
Mobile app, Capitalise.ai
|4.8/5||Visit Site eightcap Review|
Web platform, MT4
|4.7/5||Visit Site easyMarkets Review|
WebTrader, Iress, VPS
|4.6/5||Visit Site fpmarkets Review|
What are Options Broker?
Options are futures contracts that give an option trader an access to buy or sell something at a later date at a specified price. This may be, for instance, underlyings such as stocks, indices, currencies or commodities. Options are traded on so-called futures exchanges, also referred to as derivatives exchanges, on which transactions are carried out in the present but not fulfilled until the future.
In order to be able to buy or sell options as a private investor at such trading venues for derivatives, e.g. Eurex, an options broker is required who acts as a broker and forwards the order to the options exchange. For this, the options broker requires confirmation from the investor that is authorized to conclude financial futures transactions. We have listed the best options brokers in Canada above so that Canadian traders can trade options from legit brokers.
Pros & Cons of Options Trading
Depending on which trading strategy you pursue with options trading, you can create additional income with options in Canada. You can better manage your risks in your portfolio, for example by hedging your equity positions with options. Trading options offers benefits in both the short and long term.
Pros of options trading
- Extra income – options allow you to generate additional income, for example by writing options on stocks that you hold in your portfolio.
- Manage risks – options can protect your portfolio. You can hedge your positions by using certain option strategies.
- Low capital requirement – trading options requires less capital than buying the underlying asset directly. You only acquire the right to buy the underlying asset, for example a share, at a later point in time at a fixed price.
- Versatile possibilities – due to the enormous number of options and option strategies, these offer opportunities in every market, regardless of whether the exchanges are in an upward or downward trend.
- Lever – options trading allows you to take advantage of the leverage of options contracts.
Cons of options trading
- Option risk – if you write options as a writer, you are entering into obligations to purchase or deliver the underlying asset. Because of this obligation, you theoretically have an unlimited risk of loss.
- Underlying is bundled – options contracts must always be traded as a whole contract. It is not possible to purchase just a part. Therefore, when buying an options contract, you always acquire a pre-defined number of options that cannot be changed.
- Risk of loss – when trading options, you can lose all of your capital investment if the price of the option’s underlying asset does not move in the expected direction.
Why are Options powerful?
Options have a lot of power because they are great for enhancing your portfolio. Options can add income, leverage and protection. Situation depending, there is normally a scenario for Options that is appropriate for any investor’s goal.
An example is using Options as a hedge when the stock market is declining – this can limit losses. You can also use Options for the generation of a recurring income. Often, people use them for speculative purposes like wagering what direction the stock will go.
Options trading Canada
For a stock to be an option in Canada, it has to be listed on a stock exchange in the country, the Toronto Stock Exchange, for example. What’s more, the market capitalisation of the stock has to be in the top 25% of securities on exchanges in Canada.
How to trade with Options in Canada
When you trade with options, you first have to decide if you’re going to predict a rise or fall in the stock price. Binary options take the philosophy of options but make it settle on an outcome that is fixed.
For example, the outcome either happens or it doesn’t – there are only two options, hence the term ‘binary options’.
When trading a binary option, you’re essentially answering this question: at this time, will this stock be above this price? If you believe it will, you buy the option. If you think it won’t, you sell the option.
Trading binary options has sometimes been discussed as akin to gambling and it isn’t a completely inaccurate description. After all, you put down your investment like a bet – you’re predicting that the market will change in a certain way. You decide your expiry date, time and price and then hope that your prediction comes true.
An example in practice
Let’s say you pay $500 for a binary option for something that is trading at $100 per share and set your strike price to $150 with a prediction that the stock price will rise above that amount on November 22nd at 10 am. If you are right, you receive a payout. If it doesn’t rise, you lose the $500.
The good news about binary options is that you will never lose any more than what you invest. If your prediction is wrong, you lose the amount you invest but no more.
Essentially, your risk is capped at what you pay in. You can see why people think of binary options as wandering into gambling so it’s not for new or part-time investors.
Learning about trading options
Despite the high risks, options are an attractive way for many investors to branch out as well as add new assets to portfolios. Options have the potential to give high returns and they can be a cost-effective way of acquiring new stock when growing a business.
Also, they’re a good way of mitigating losses when a stock’s price begins to drop. Entering into trading options isn’t for newbies or the faint-hearted. It really does pay to read up and do your research.
Where can you find options trading resources?
There are many places that offer resources on trading options. Charles Schwab has resources for clients and Fidelity also has a strategy guide to help investors learn about the many different trading strategies for options. Other online resources include TastyTrade and Option Alpha. These offer a lot of free resources like podcasts and courses to help investors get to grips with option trading basics.
What you need to be aware of when trading options
Trading options does come with high costs and you will pay commissions every time you sell or buy options. These commissions can eat into profits quite considerably. Another thing to be aware of is that there is limited room for error with options. With traditional stocks, you can hold them indefinitely and hope that they rise in value. Options, however, always have expiry dates.
If you don’t sell or exercise the option before the expiry, it becomes worthless. To be profitable with Canadian options, you have to be correct with the time frame, price change and price direction.
Conclusion – should you start options trading Canada?
Trading options is a good idea for experience, full-time investors who have done their homework. It’s not a good idea for newbie investors or those who just dabble from time to time.
There are lots of ways of trading options in Canada but it’s always best to do your research before parting with your money. It’s much easier to lose money when trading options than it is with other stocks.