Options Trading

Leverage a security's price movement for potential profit.


What is Options trading?

Options trading is the purchase or sale of a contract of an underlying security. Investors can trade options to potentially benefit in any market condition.

But what are options? An option is a contract between two parties that gives the holder the right, without the obligation, to buy or sell a security during a designated time period at a specified price. Option writer has the obligation to fulfil their part of the contract if exercised.

There are many strategies investors can use in options trading, each with their own benefits and risks.

Benefits of Options

  • Leverage

    Tends to utilize capital efficiently by participating in an underlying asset's price movement without usually having a position in it

  • Revenue generation

    Potentially earn revenue by selling options for premium

  • Risk mitigation

    Can be used to help hedge against unfavourable market conditions


Things to consider

There are many things to be aware of when trading options. An important consideration to keep in mind is that the option seller (writer) can incur losses greater than the price of the contract. Consider each option strategy itemized below and the risks associated with it. Additionally, if the contract is not acted upon within the expiry date, it simply expires, and the premium paid to buy the option is forfeited by the seller. Note, TD Direct Investing automatically exercises options that are in-the-money for $0.01 or more.

Variable degree of risk

Transactions in options carry a high degree of risk. Purchasers and sellers of options should be familiar with the option type (call vs put) they contemplate trading and the associated risks.1

Description

Option strategy benefits

Option strategy risks

Long Call

In this options strategy, the holder of a Long Call has the right to purchase the underlying security at the exercise2 price at any time prior to expiration.

This strategy has unlimited upside potential.

The risk is limited to the price paid for the option contract or the premium paid for buying the Long Call.

Long Put

The holder of a Long Put Option has the right to sell the underlying security at the exercise price at any time prior to expiration.

The benefit is limited to the strike price3 minus the premium.

The risk is limited to the price paid for the option contract or the premium paid for buying the Long Put Option.

Covered Call Write

In a Covered Call Write, the writer buys the underlying stock and writes calls against the holding.

Additional income can be earned by selling the call option against the stock.

Risk can occur when the market price of the underlying stock falls.


Variable degree of risk

Transactions in options carry a high degree of risk. Purchasers and sellers of options should be familiar with the option type (call vs put) they contemplate trading and the associated risks.1

Description

Benefit of strategy

Strategy risk

Bull4 Call Spread

This strategy combines a long lower strike call and a short higher strike call with the same expiration.

The benefit is limited to the difference between the two call strikes minus the premium.

Risk is limited to the net debit, or the premium paid for the spread.

Bear5 Put Spread

The Bear Put Spread combines a long higher strike put and a short lower strike put with the same expiration.

The benefit is limited to the difference between the two put strikes minus the premium.

Risk is limited to the net debit, or the premium paid for the spread.

Bear Call Spread

This strategy combines a long higher strike call and a short6 lower strike call with the same expiration.

Limited to the net credit or premium received for the spread. The bigger the difference between the strikes, the bigger the potential profit.

Risk is limited to the difference between the two call strikes. The bigger the difference, the greater the risk.

Bull Put Spread

This strategy combines a long lower strike put and short higher strike put with the same expiration.

The benefit is limited to the net credit, or the premium received for the spread.

Risk is limited to the difference between the two put strikes. The bigger the difference, the greater the risk.

Calendar Spread

The Calendar Spread has the same strikes with different expirations, using either both calls or both puts. Long back month and short front month.

The premium received from the short option minus the profit from selling the long option after the front month expires worthless.

Risk is limited to the net debit, or the premium paid for the spread.

Long7 Combination/ Straddle

This high volatility strategy combines a long call and a long put at the same strike (straddle) or different strikes (combination) at the same expiration.

The benefit is potentially unlimited.

The risk is limited to the cost of the straddle or combination.


Variable degree of risk

Transactions in options carry a high degree of risk. Purchasers and sellers of options should be familiar with the option type (call vs put) they contemplate trading and the associated risks.1

Description

Option strategy benefits

Option strategy risks

Short Call

This income strategy involves selling/ writing a call option Uncovered or Naked8.

Potential profit is limited to the premium received when writing the call.

Risk is unlimited, as the market price can potentially rise indefinitely above the strike. This can also be affected by margin requirements.9

Short Put

In the Short Put, an investor sells/ writes a put option Uncovered or Naked.

Potential profit is limited to the premium received when writing the put.

Risk is limited to the strike price minus the premium.

Short Combination/ Straddle

A short call and a short put at the same strike (straddle) or different strikes (combination) with the same expiration.

Profit potential is limited to the premium collected for writing the straddle or combination.

The Short Combination/ Straddle has unlimited risk.


Are Options right for me?

Options may be considered by an investor who:

  • Understands the underlying concepts of options trading
  • Understands the advantages as well as the risks of a chosen investment strategy
  • Knows how to manage a portfolio when reacting to changes in the market

Discover more about Options

TD Direct Investing invites you to join us in a series of events to help enhance your understanding of options trading. All investors are welcome, whether you are an experienced options trader or simply want to get started, there's something for everyone. Webinars, Master Classes and Videos. See the calendar of events.


Options are contracts that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. When you trade options, you’re essentially speculating on future price movement of the underlying security i.e., whether a stock will decrease, increase or remain the same in value, time period in which these changes will happen and extent to which it will deviate from its current price. Investors, generally, consider these parameters, to decide whether or not  to enter into a contract to buy or sell a company’s stock. 


How to trade options?

There are a few things to take care of before placing an options trade. In this lesson, we'll highlight the types of TD Direct Investing platforms and accounts that can support those trades. We'll also identify different levels of options approval and margin equity requirements.


Yes, if you are interested in trading options, you can apply at TD Direct Investing for approval once you become a client.


Once an investor has decided on an option trade, the next step is to place the order. In this lesson, we'll walk through an options trade ticket and demonstrate how to monitor order status.


As a holder, you can choose to sell the contract at the current market value (ideally at a profit) or allow the option contract to expire worthless.


A put option is a contract or a derivative instrument in financial markets that entitles the owner to sell a specific security, usually a stock, by a set date at a set price to the writer of the put.  A call option, which is opposite of put option, is a contract that entitles the owner the right, but not the obligation, to buy usually a stock, bond, commodity or other asset at set price before a set date. In both cases, the owner can either exercise the contract or allow it to expire, hence the term “option.”


  • Call Options – capitalizing on investment knowledge

    • A Call option is your right to buy a security at a specified price by a defined date
    • Your profit is what's left over when the strike price is subtracted from the stock price on or before the date the option expires
    • You pay a premium with a call option which is the price of the right to buy it
    • An option's premium is priced by calculating its value and how much volatility is expected until it expires
  • Put Options – helping you cash in when prices plunge

    • A Put option is the right of the holder to sell a security at a specified price by a certain date
    • The price the Put option owner can sell at is called the strike price
    • When you sell a Put, you get the difference between the strike price and the underlying asset's price
    • You also pay a premium to the Put option's writer when the contract is initiated

Trading Options on the TD app

Discover how you can access comprehensive option chains and trade single or multi-leg options - right on the TD app.

Trading multi-leg options strategies on the TD app

Looking to trade options strategies, like vertical spreads or covered calls? The TD app offers multi-leg order (MLO) entry where you can trade up to two option legs simultaneously within the same order ticket.


Visit the TD Direct Investing Learning Centre today for more Options-related content.


Options pricing: clear and simple

It's the service, support, and overall experience of investing with us that defines the value for you.

  • Standard: $9.99 flat rate to buy or sell

    Canadian & U.S. stocks standard online commission rate.

  • Active trader: $7.00 flat rate

    150+ trades / quarter on Canadian & U.S. stocks, + $1.25 per contract for Canadian & U.S. options

  • What you get:

    • Real-time market data and quotes for the Canadian and U.S. markets
    • Exclusive research reports
    • Educational resources that are online and on-demand

Open an account online – it's fast and easy

Whether you're new to self-directed investing or an experienced trader, we welcome you.

  • Apply online

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