Introduction to options trading

Looking up an option quote table (sometimes called an option chain) using Questrade Edge desktop is easy..

First, launch the application on your PC or Mac, and log in.

Next, click Options from the top menu, and enter the ticker symbol of the underlying security.

1. The Symbol lookup box here allows you to switch between different underlying securities.
2. The menu on the left allows you to switch between viewing single-leg options (buying or selling a call or put), or complex multi-leg options strategies which involve combining different types of options or stock ownership.
   • Check out this article on Option levels for more information about the different types of strategies available.
3. The menu here allows you to switch between viewing different expiration dates.
   • You can choose to view only options expiring soon (near), in a long time (far),  All expirations, or a select date.
   
4. You can also choose to change how many Strike prices are shown in the quote table below.
   • You can view any amount from 4-9, or choose to view All strike prices
   • Please note: If you choose All strike prices, and All expiration dates, depending on the speed and performance of your computer, you may experience slowdowns due to the amount of information streaming and processing in the background.
5. Below the menus and symbol lookup, you’ll see a simplified level 1 quote with important information about the underlying asset like the Bid, Ask, Volume and change in price.
6. The Settings button on the top right allows you to edit the default columns of information displayed here in the options quote table.
   • By default, you’ll see the Bid, Ask, Last traded price, Change in $, Volume, Open interest, and Implied volatility.
   • The additional columns available are: Ask size, Bid size, Change in %, and the various Options “Greeks”:
     • The “Greeks” (Delta, Gamma, Rho, Theta, and Vega) are explained in more detail in the section down below.

Let’s take a deeper look at the options quote table:

With the default view, Calls are shown on the left, and Puts are shown on the right side.

Options highlighted in blue are considered to be In-the-money, in this example, SPY’s price per share is $452.64.

You can also edit this default view by jumping into the Settings at the top right of the widget. Pick from custom colours, fonts, and much more.

1. On the top left, we’ll see the expiration date for the 4 strike prices shown.
   • You can also click to hide this specific expiration date, or click to expand any other dates below.
2. On the top right, we’ll see the amount of days left until expiry.
3. Click on any of the Bid or Ask prices to quickly add this specific option to a new order entry widget.
   • Clicking the Bid or Ask will set up a limit order with that specific price.

Tip: You can also ‘link’ this widget with any other widgets (level 1, order entry, charts..) by clicking the chain icon in the top right, and choosing a colour. This widget will then be associated with that colour, and if you link any other widgets such as a level 1 quote with the same colour, both widgets will automatically update to the same symbol. (I.e. Green link for options and green link for chart.)

Example 1 - Buying a Call:

Josh is an investor who’s closely following company ‘XYZ’ trading at $100 per share and expects them to rise in price. In anticipation of this price increase Josh buys a call option on XYZ with a strike price of $120, and an expiration date 2 months out. This gives Josh the right, (but not the obligation) to buy 100 shares of XYZ for $120 per share before his call option expires worthless.

If XYZ rises in price sharply to $130 per share, Josh can exercise his option contract’s rights, and buy 100 shares of XYZ at $120 from the original seller of the options contract. In this example, Josh could profit $10 per share since he can buy XYZ at $120, and immediately sell it into the market for $130 per share. In a real-world scenario, Josh would subtract the premium he paid originally from his overall profit. If he paid a $2 premium for the call option, this reduces his profit to $8 a share.

Rather than exercising his call option, Josh can also choose to sell it back into the market before the expiration date. He could potentially profit off the increase in intrinsic price since the option is now in-the-money. This way he doesn’t have to deal with exercising the call, taking delivery of the shares, then having to sell them.

If XYZ only rises to $122, or lower, ($120 strike price + $2 premium paid) Josh’s call option would not be profitable to exercise, and his contract would likely expire worthless. He can try to sell it back to the market before the expiration date, but due to the time decay, he will most likely have booked a loss on the trade.

Example 2 - Buying a Put:

Nia is a trader who currently owns 500 shares of ‘ABC’ trading at $50 per share, and is worried about the shipping delays affecting the company’s manufacturing. Anticipating a drop in share price, Nia buys five put contracts (representing her 500 shares) with a strike price of $45, and an expiration date 6 months out.

In this example, Nia is using Puts as a Hedging strategy, protecting her original investment of 500 shares by creating a “price floor” or minimum price she can sell at. Nia pays $2 per put contract for a total of $1,000 in option premiums ($2 * 5 contracts * 100 options multiplier).

If ABC drops in price to $30 with increasing manufacturing problems and shipping delays, Nia can exercise her 5 put contracts to sell her shares at the strike price of $45. With this strategy, Nia will only book a $3,500 loss ($1,000 options premium + $2,500 loss in share price), instead of a loss of $10,000 if she had to sell at $30.

If ABC does not drop in price, but rather increases to $60, Nia’s puts will most likely expire worthless, and she will lose the $1,000 premium paid. If she chooses to sell her shares however, she can lock in a gain of $5,000 (minus the $1,000 premium for the puts).

Example 3 - Selling a Call:

Yang is an investor who currently owns 200 shares of ‘XYZ’ trading at $100 per share, and does not anticipate the price to move significantly in either direction. He’d like to earn some additional income while his shares of XYZ are ‘trading sideways’ so he sells 2 call contracts at a strike price of $110, with an expiration date 1 month away, for a premium of $1.25 each.

His total income from selling the calls is $250 ($1.25 * 2 contracts * 100 options multiplier).

If by the end of the month, XYZ has not reached a price per share of $110, the calls will expire worthless, and Yang will keep the premium as profit.

If by the end of the month, XYZ is trading at $115, it is very likely that Yang’s calls will be exercised and he will be assigned to sell his 200 shares of XYZ to the buyer of the calls at only $110 per share (the strike price).

In this example, Yang will profit on the initial $250 in premiums, and the $10 increase in share price from $100 to $110 for a total profit of $2,250. However, Yang will lose the ability to profit on the per share increase from $110 to $115 for a total of $1,000 in missed potential gains.

This strategy of combining stock ownership with selling a call is also known as a Covered Call strategy.

Example 4 - Selling a Put:

Fatima is a trader who is looking to buy shares of ‘ABC’ that is currently trading for $50, but would like to buy the shares at a discount - around $40 if possible. She can simply wait and see if the shares drop in price to $40, however she can also sell a put as part of a strategy.

Fatima decides to sell 1 put contract on ABC with a strike price of $40 for a premium of $3, she immediately books a profit of $300 in total premiums ($3 * 100 options multiplier).

If ABC declines in price below $40, it is very likely that Fatima’s put will be exercised and she will be assigned to buy 100 shares of ABC at the strike price of $40.

Because Fatima booked the $3 profit per share in premiums earlier, this reduces her cost basis for ownership of ABC to only $37 per share ($40 strike - $3 premiums received). If she plans to own ABC all along, this strategy enables her to collect the premium while waiting for her opportunity to buy shares at a discount.

If ABC however does not reach $40 in price before the put expires, Fatima will keep the premium as profit, however she may lose the opportunity to buy the shares at the price she’s looking for.

This strategy Fatima is using is sometimes called a Cash-secured Put, and also comes with some inherent risks. If ABC drops suddenly in price all the way to $20, Fatima could be forced to purchase shares for a strike price all the way at $40. If ABC continues to decline even further, Fatima could be forced to book a significant loss, or wait and see if the share price recovers.

Options trading can be an incredibly useful, versatile tool once you understand the basics. But they can also carry significant risk depending on how you use them, and how they can fit your trading strategy.

Options can be used speculatively to maximize profits, while potentially limiting the amount of capital you have to risk, or they can be used as hedging strategies to reduce risk on an already existing position.

As Warren Buffett once famously said “Risk comes from not knowing what you’re doing.” Before trading Options, make sure you understand the potential risks, obligations and rights that come with buying, or selling Calls and Puts.

Here are some common tips and tricks, and common risks to watch out for when getting started with options trading:

Watch the Volume, and the Bid-Ask spread

When buying or selling options for the first time, many traders will notice that the difference between the Bid price and the Ask price can be quite large (sometimes called a ‘wide’ spread) compared to the underlying stock. This all depends on the volume of the options contract (how many contracts are trading hands between traders), and the open interest (how many contracts are ‘out there’ in the market).

Since the same underlying asset will have hundreds of different combinations of Strike prices, and Expiration dates, the open interest, and volume can vary significantly between options for the same security.

Between different underlying assets, how “popular” the Stock, ETF or Index is can also have a big effect on the volume and open interest.

For example: Options contracts on a small-cap Canadian company will have much lower volume and open interest than options contracts on the SPX.in (SP500 index).

When buying options, you risk losing the entire premium

Many Call or Put options will expire worthless if they are not “in-the-money” by the end of the trading day on expiration. Therefore as the buyer of the option, you risk losing your entire investment (the premium you paid originally).

Zero-day or 0DTE Options are more complex

Zero-day (sometimes called 0DTE or ‘days till expiration) Options are Calls and Puts that expire on the same day they’re bought or sold.

Since these options will have little to no Time value, their prices are completely determined by the percentage of implied volatility, and any intrinsic value (whether it’s in, or out-of-the money).

Whether you’re an option buyer, or seller, this “ticking clock” of zero-day options adds an additional element of risk (or protection in rarer cases). A zero-day option can have some time value at the start of the trading day, but if it’s “OTM” as 4pm approaches, this rapidly drops to $0.

Check out our Options FAQ below for more information on common questions about zero day options.

Writing an option is inherently much riskier

Compared to buying (or going long) an option, where the maximum loss is the premium paid, writing (or going short) an option is much riskier (in most scenarios).

When you write an option, you take on the obligation to buy or sell shares at the strike price if called upon to do so (assignment), no matter what the current price per share is.

For example: You write a Call option on Stock XYZ trading at $10 with a strike price of $12, and you don’t own shares of XYZ (this is referred to as an “uncovered, or naked call”).

Due to unexpected popularity on online message boards, XYZ unexpectedly rises in price to $100. As the original Call writer, you will be assigned, and due to your obligations, you now must sell 100 shares of XYZ at the strike price.

But since you don’t own the shares, you are forced to immediately take a short position of -100 shares of XYZ to satisfy the obligations of the Call. When you take this short position, the 100 shares are sold to the Call buyer at the Strike price of only $12.

The short position will start off with a negative P&L of -$8,800.

If the short position is not possible (due to inventory, liquidity, or volume), you may be forced to buy 100 shares at $100 each in the open market for $10,000 (representing 1 call contract). Which are then sold for only $12 each for a total loss of -$8,800.

Writing “Uncovered Calls” exposes you to unlimited losses, while the maximum profit will only be the premium received.

Options are organized by level

Writing options is limited by an account’s Options Level. Generally speaking, only a limited number of short/writing strategies are permitted in Registered accounts.

To trade options, you must first enable this in your account. Check out the article linked above for more details on enabling options, the various strategies and what level they’re organized under.

What happens to my Call/Put on expiration day?

Depending on if your option is ITM, or OTM, and whether you’re the buyer, or the writer, you may have certain obligations, or rights on expiration day.

These actions you take on the expiration date can have a significant impact on your overall profit and loss.

Please check out our Options FAQ below for more information about what happens to your option on expiration day.

This article does not disclose all of the risks and other significant aspects of trading in options. In light of the risks, you should undertake such transactions only if you understand the nature of the contracts (and contractual relationships) into which you are entering and the extent of your exposure to risk.

Trading in options is not suitable for many members of the public. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances.

Transactions in Options carry a high degree of risk. Purchasers and sellers of Options should familiarize themselves with the type of Option (i.e. put or call) which they contemplate trading and the associated risks.

You should calculate the extent to which the value of the Options must increase for your position to become profitable, taking into Account the premium and all transaction costs.

The purchaser of Options may offset or exercise the Options or allow the Options to expire. The exercise of an Option results either in a cash settlement or in the purchaser acquiring or delivering the underlying asset.

If the purchased Options expire worthless, you will suffer a total loss of your investment which will consist of the Option premium plus transaction costs.

If you are contemplating purchasing deep out of the money Options, you should be aware that the chance of such Options becoming profitable ordinarily is very remote.

Selling (‘writing’ or ‘shorting’) an Option generally entails considerably greater risk than purchasing Options.

Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount. The seller will be liable for additional Margin to maintain the position if the market moves unfavourably.

The seller will also be exposed to the risk of the purchaser exercising the Option and the seller will be obligated to either settle the Option in cash or to acquire or deliver the underlying asset.

If the Option is ‘covered’ by the seller holding a corresponding position in the underlying asset or another Option, the risk may be reduced.

If the Option is not covered, the risk of loss can be unlimited.

Certain exchanges in some jurisdictions permit deferred payment of the Option premium, exposing the purchaser to liability for Margin payments not exceeding the amount of the premium.

The purchaser is still subject to the risk of losing the premium and transaction costs. When the Option is exercised or expires, the purchaser is responsible for any unpaid premium outstanding at that time.