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Some traders enjoy the high risk and reward that comes with volatile markets. These traders often prefer to trade options. This page is a simple guide to understand options trading, along with five options brokers to get started with.
If you’re in a hurry, here are three popular options brokers to explore:
- Plus500: Options CFDs including commodities and shares
- City Index: One-click trading on a variety of financial products
- easyMarkets: Vanilla options including forex pairs and precious metals
Getting Started With Options Trading
Options trading is a type of agreement where two parties agree to carry out an optional trade within a particular time frame. One of these parties holds the right to buy (call) or sell (put) within that time frame, while the other party is obliged to hold the order and fulfill it if requested to do so.
Here are the key terms used to understand options trading:
- Options contract: A formal agreement containing the options trade’s terms.
- Strike price: The fixed price both parties agree on when opening an options contract.
- Expiration date: The date on which the options contract expires.
- Option premium: The price the seller or buyer with the right to transact pays. Think of it as a coverage fee, in case the trader chooses to withdraw from the transaction.
- Call option: An options agreement where a party buys the right to purchase at a fixed price before an expiration date.
- Put option: An options contract where a party buys the right to sell at a fixed price before an expiration date.
How Call Options Work
Please note, this is an example trade – not a recommendation.
Call options are profitable when the party with the right to buy can execute the trade at a lower price (minus the options premium) than the price at the time of the agreement. Here’s an example:
Joanna wants to sell her property, which is valued at $500,000. Frank offers Joanna an options agreement to purchase the property for $500,000 within the next six months, with a 2% up-front premium of $9,000. Joanna agrees and has to hold the property for Frank for six months.
- Completion Scenario: Joanna’s property appreciates to $550,000, and Frank decides to buy and profits $50,000, minus the $9,000 options fee, making $41,000 in total profit.
- Withdrawal Scenario: Joanna’s property devalues to $450,000, and Frank withdraws, losing the $9,000 premium. The property is back on the market. Frank avoids a $50,000 loss by paying a $9,000 premium, with which Joanna is compensated for her waiting time.
How Put Options Work
Please note, this is an example trade – not a recommendation.
Put options are the inverse of call options. With put options, the party with the right to sell can execute the trade at a higher price than at the time of the agreement (minus the premium). Here’s an example:
Frank desperately wants Joanna’s property that’s worth $500,000. She offers him an options contract where she can sell it to him for $500,000 within the next 6 months for a premium of $9,000. Frank agrees.
- Completion Scenario: Joanna’s property devalues to $470,000 — she chooses to complete the sale. She is up by $30,000, minus the $9,000 premium, making a total profit of $21,000.
- Withdrawal Scenario: Joanna’s property appreciates to $540,000 — she withdraws and loses the $9,000 premium to Frank, but has a property on her hands that’s worth $40,000 more than at the time of the agreement.
Options Trading Fees
Options brokers charge several fees that traders should be aware of. The following fees may apply when trading options:
- Options trade fee: charged for every options trade — most brokers don’t charge these.
- Contract fee: paid for each contract traded.
- Other commissions: brokers may negate the terms “options fee” and “contract fee”, and charge a per-trade commission instead.
What is an Options Premium?
Brokers charge a fee referred to as the options premium. This sum of money covers the risk that the broker takes while holding a contract for the trader, should the trader decide to pull out of the agreement by right.
The options premium is determined by factors like:
- Contract value: the premium is primarily determined by the immediate price of the contract.
- Asset volatility: higher volatility translates to a higher risk/reward potential, resulting in a higher premium.
- Expiration date: asset prices fluctuate over time, which can result in longer-term options contracts turning from a losing position to a profitable one. This is also referred to as time value.
Four Features That Make a Good Options Trading Platform
Traders prefer platforms with features that contribute to an efficient and streamlined trading experience. This can include anything from trading tools to educational resources.
Here are four features we found helpful from four different options brokers.
Advanced Trading Information With Plus500
There's more to trading, of course, than buy and sell prices. The amount you trade and your risk/reward potential depends on other factors like margin rates, various trading fees like overnight fees, or even maintenance fees.
Plus500 has a neat “Info” toggle within their trading window that shows us these statistics, including when the next trading session starts.
easyMarkets’ Charting Tool
At first glance, the easyMarkets platform looks plain and bland, but it isn’t so. Their universal charting feature is loaded with features. These include built-in chart comparisons, templates, and multiple ways to annotate.
1-Click Trading With City Index
The City Index platform offers 1-click trading to options traders. The 1-click trade functionality lets traders execute a previous trade again in a single click without having to specify the conditions of trading that product again. On the upper right-hand side of the account menu bar, all traders have to do is switch on a toggle, labeled “1-click trading”.
Once the toggle is on, even options trades can be executed in a single click on a simplified buy/sell screen.
IG.com’s Draggable Dashboard Layout
IG.com’s options platform is a great one for multitasking. When you log in for the first time, you’re greeted by a near-empty dashboard. However, you may customize this dashboard to fit various tabs alongside one another, including the list of markets, multiple trade execution windows, and the position manager.
Five Popular Options Brokers Compared
Here are five options brokers who happen to offer attractive features for options traders — we have compared some of the good-to-knows to give a clearer overview.
|Type of Options||Other Products||Minimum Deposit||Our Broker Review|
|Plus500||Options CFDs||CFDs Only||$\£\€100||Read Review|
|easyMarkets||Vanilla Options, easyTrade (option-like product)||CFDs, Forwards||$\£\€100||Read Review|
|City Index||Options CFDs||CFDs, Forex, Spreadbetting||None||Read Review|
|AvaTrade||Forex Options CFDs||CFDs, Forex||$\£\€100||Read Review|
|IG.com||Vanilla Options, Barrier Options||CFDs, Spreadbetting||$\£\€300||Read Review|
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The aforementioned brokers also offer a variety of trading instruments like:
- Cryptocurrencies: Bitcoin, Bitcoin Cash, Dash, Decred, Dogecoin, Ethereum, IOTA, Litecoin, Monero, NEO, Ripple, Verge, ZCash
- Precious Metals: Gold, Silver, Palladium, Platinum
- Agricultural Commodities: Cocoa, Coffee, Cattle (Live and Feeder), Oats, Soybeans
- Energy Commodities: Crude Oil, Heating Oil, Electricity, Natural Gas, Coal, Uranium
What are ETF Options?
Exchange-Traded Funds (ETFs) trade in a similar way to stocks. Unlike stocks, an ETF represents a basket of multiple assets, rather than a single asset.
ETFs vs. Mutual Funds: What’s the Difference?
While both ETF and mutual funds are assets grouped in one offering, the main difference between the two is the method of management and trading times.
Mutual funds are purchased and sold just once daily and are actively managed by experts — this also results in higher costs. ETFs are passively managed and traded throughout the day like stocks.
What About ETF Options?
ETFs have various derivatives, such as futures, and forwards. ETF options are one of these derivatives.
ETF options are products that allow traders to leverage long and short positions on ETFs.
Unlike Index options, ETF options can also be subject to early exercise where the options holder can carry out the trade at the strike price before the expiration date.
ETF options are standard put and call options contracts where traders speculate on the price of a particular market in a given time frame.
Brokers also offer leveraged derivatives like CFDs on particular ETFs.
There are many questions about options. Here are a few Qs and As to some common queries.
How difficult is options trading?
Options trading is a high-risk, high-reward form of trading, so it can be thought of as a more difficult type of trading for more advanced traders. That said, once you understand how options work and learn how markets of interest tend to move, options can lead the way into the intermediate trader league.
Are options riskier than stocks?
Generally, trading options is riskier than stocks. Despite the ability to withdraw from an options agreement, trades must factor in the potential loss of a sizable options fee. Traders holding long positions on assets can also hedge against losses, where covered calls are placed and the options contracts are used as an income stream.
What is the safest options strategy?
There are many options strategies available to traders, but every trade entails risk. Each trader develops a unique process, informed by market knowledge and technical analysis, which allows for more accurate speculation. Another “safer” way to trade options is hedging, where long-held assets are used to generate lower reward, lower risk income.
What types of options traders are there?
Since time frames are especially a key factor in options trading, traders are often considered more active than traders of other, conventional markets. Swing traders tend to trade every few days, while day traders may trade every few hours. Active trading in options doesn’t necessarily mean daily execution of trades, but a constant presence and awareness of the market movement. Options traders tend to track the market at all times for opportunities to execute at a profitable time.
What is the best broker for options trading?
Traders’ preference for a broker depends on factors like platform quality, fees, and markets offered. The features of a platform are especially important as they may support a trader’s ability to keep up with relevant market statistics and news. A good platform supports the trader in maximizing the chances of a profitable trade.
Are there options trading apps on mobile?
Several brokers offer mobile applications, though AvaTrade stand out with their AvaOptions mobile app. AvaOptions was specifically created with mobile options traders in mind. It is a feature-rich application with advanced trading tools and can be downloaded from the iOS app store, or Google Play store.
If you'd like to learn more about what the world of trading and online brokers have to offer, here are a few resources you may find interesting:
- Read some of our expert broker reviews
- Flick through the beginners trading guide before you start trading
- Scam avoidance for beginners and professionals
- Become familiar with the regulators who keep you and your funds safe
- Learn about agricultural commodities
- Explore metal commodities
- Find out why traders trade energy commodities
- An introduction to trading cryptocurrencies
Credits: Original article written by Marko Csokasi. Major updates and additions in July 2020 by the Commodity.com editorial team.