Which option?
An option is a contract to buy or sell a security at a certain price, called strike priceon or before the expiration date of the option. Options are available for each individual sharesstock indices, commodities and other securities. They trade on stock exchanges and can be bought and sold both through brokers and self-directed investment platforms.
Read more in the MoneySense Glossary: Which option?
Why are options popular right now?
Combined with increased stock market chatter on social media and market volatility, options trading has gained momentum among Canadian investors and investors. The trend really grew during the crisis when many were stuck at home and has since continued, with options trading up 89.4 percent in 2023 compared to the previous year, said a report by the World Federation of Exchanges.
Social media and online commentary have created demand for options trading, said Josh Sheluk, portfolio manager at Verecan Capital Management. “People hear what a great person on Reddit has done with a niche business and they want to try to do the same thing and get very rich, very quickly,” Sheluk said. “It’s become very attractive.”
However, he cautioned that this type of trading is very risky for do-it-yourself investors. “I don’t think a lot of do-it-yourself investors really understand how much risk they’re taking on in options trading.”
What can you do with options?
Options—a derivative whose value is directly linked to an underlying asset or stock—allows investors to bet on which way the stock will move at a given time. It is a contract between two investors. There are two types of options: puts and calls.
What is a placement option?
Put options are derivatives. This means that their value is based on the value of another security, usually a stock. Puts are also available on currencies, indices and other assets. A put option, or put, is a contract that gives you the right, but not the obligation, to sell the underlying investment at a certain price, called the strike price, before the option expires. The price of the put is called the premium, which varies depending on several factors, including the current price of the stock and the time remaining until the expiration date.
Read more in the MoneySense Glossary: What is a put option?
What are the call options?
A call option gives investors the right to buy a stock at a certain price and a put option is the right to sell a stock at a certain price. For example, if a stock is trading at $50 per share, an investor can buy a call option for $55—predicting that the stock will rise five dollars during the period, Sheluk said.
“As the owner of that ‘beat’ method, if the stock price goes from $50 to $60, you are very happy because you can buy that stock for $55, when in the market, it would be $60,” he explained. Not so good for the option seller, who would have to buy the stock at market value and sell it back at the option’s strike price of $55.
Where can you buy phone options in Canada?
If the stock does not reach the strike price of the option, the entire investment will be lost. The drop in options trading costs, especially in DIY investment platforms, has also attracted new investors to the space. At Wealthsimple, for example, investors can trade options for as little as $1.
Major banks have also started to reduce options trading fees as competition between investment platforms increases. Last month, the Bank of Montreal lowered the fees paid to options traders who make more than 150 trades per quarter.
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