There are two types of stock options: calls and puts.

• A call option gives the owner the right to buy 100 shares of the underlying stock at the strike price anytime before the option expires;
• A put option gives the owner the right to sell 100 shares of the underlying stock at the strike price anytime before the option expires.

Key information about an option is given directly in its symbol. e.g., a Research in Motion (RIM.TO) call option with a strike price of $55, expiring in August, will have the following symbol:

RIM 100821C00055.000.MX

• RIM: the underlying stock, i.e., Research in Motion
• 10: the expiry year, i.e., 2010
• 08: the expiry month, i.e., the eight month, August
• 21: the expiry day, i.e., the 21st
• C: if the option is a call (C) or put (P)
• 00055.000: the strike price, i.e., $55
• .MX represents Canadian options; .O represents U.S. options

QuestraderWEB

1. Login to the platform and select the green View market data on the top right of the page;
2. Select the Options tab, fourth from the left;
3. Enter a stock quote and use the filters to identify the option;
4. To the left of the option you want to trade, click Trade;
5. On the order entry form, enter the number of contracts you want to buy, and select your order details. To buy a call or a put, choose buy to open as the transaction type;
6. Click Preview order. Review the order then select send.

To sell the position, enter the order details and select sell to close as the transaction type.

QuestraderPRO and QuestraderELITE

1. Login to the platform and open an options window;
2. Enter a stock symbol and view its options chain;
3. Click on an option to populate it in the order entry box;
4. On the order entry box, enter the number of contracts you want to buy and select your order details;
5. Click buy to open to buy a call or a put.

To sell the position, enter the order details and click sell to close.

Liquidity for options is generally thinner than for stocks. When purchasing multiple contracts:

• Use limit orders to reduce the risk of getting a large discrepancy between fill prices;
• Market orders do not guarantee a price and may be susceptible to large price fluctuations.

Some platforms may require additional data to trade Canadian options.

QuestraderWEB users do not need to subscribe to any additional data. Users on these platforms can trade both U.S. and Canadian options.

QuestraderWEB with Quotestream, QuestraderPRO and QuestraderELITE users can trade U.S. options.

Prior to trading Canadian options you need to add Canadian options data to your platform. To do so log into myQuestrade, click my platforms, then click select trading platform. Fill out the form on the right side of the page.

The cost to buy or sell a stock option (excluding commission), is the number of contracts, multiplied by the option price, multiplied by 100.

e.g., assume three $55 call options on Research in Motion (RIM.TO) can be purchased at $3.50 each. The total cost to purchase three contracts (excluding commissions) is:

3 x $3.50 x 100 = $1,050

The price of an option is determined by its intrinsic value, time value (the time remaining until the option expires), and the volatility of the underlying stock.

Intrinsic value: the difference between the strike price and the price of the underlying stock. Intrinsic value can never be less than $0.

• Call options have intrinsic value if the strike price < price of the underlying stock
• Put options have intrinsic value if the strike price > price of the underlying stock.

Time value: the cost of the option, minus the intrinsic value.

When an option has intrinsic value, it is said to be in the money (ITM).

When an option does not have intrinsic value, it is said to be out of the money (OTM).

When an option’s strike price is equal to the underlying stock price, it is said to be at the money (ATM).

Assume Research in Motion (RIM.TO) shares are trading at $57.

You want to purchase an option that expires this month, with a strike price of $55.

• The $55 call option can purchased for $3.50.
• The $55 put option can be purchased for $1.10.

Call options

• Intrinsic value:
• The price of the underlying stock minus the strike price (note: the intrinsic value can never be less than $0);
• In this example the intrinsic value is $2 ($57 - $55).
• Time value:
• The price of the option, minus, the intrinsic value;
• In this example the time value is $1.50 ($3.50 - $2).

Put options

• Intrinsic value:
• The strike price minus the price of the underlying stock (note: the intrinsic value can never be less than $0);
• In this example the intrinsic value is $0 ($55 - $57. Even though the value is less than $0, the intrinsic value can never be less than $0).
• Time value:
• The price of the option minus the intrinsic value;
• In this example the time value is $1.10 ($1.10 – $0).

To illustrate the difference between buying stocks and buying options, consider the following examples:

Research in Motion (RIM.TO) shares are trading at $57.
You can either buy

1. 100 shares at $57 each, OR
2. One call option contract with a strike price of $55 for $3.50.

The cost of trading options is significantly less than the cost of trading stocks.

In this example, the initial cost to purchase one option contract (representing 100 shares) is substantially lower ($350 versus $5,700) than the cost of purchasing 100 shares.

Scenario #1:
RIM.TO rises to $60 and the price of the $55 strike goes up to $6.20. You sell your position.

Trading options provides greater leverage compared to stock trading.

In this example, the sale of the option contract generated a ROI (return on investment) of over 77% - much higher than the return on trading stocks.

Scenario #2:
RIM.TO drops to $50, and the price of the $55 strike falls to $0.20. You sell your position.

Trading options enables you to limit the total risk of a position.

If RIM.TO continues to drop, the maximum loss for the option trader is the same as the initial cost: $350. The maximum loss for the stock trader can be as high as $5,700. In this example, though the option trader has lost nearly 95% of their initial investment, they’ve only lost $330 compared to $700 for the stock trader.

There are numerous additional strategies available, including spreads, straddles, and uncovered writing. Accounts need to be approved to trade advanced options strategies.

To verify which types of options you can trade in your account, login to myQuestrade, select my accounts, and then click account management. Select your account from the drop down menu and click trading information.

To change your option level click update an option level. Access your account to view its current option approval. To update the option strategies you can trade, fill out the form on the right side of the page.

Follow these links to dive into the world of options videos, presentations, blogs, calculators, and much more.

Montreal Exchange

• Equity options reference manual
• Guides and strategies
• Video library
• Covered call calculator

Chicago Board Options Exchange – education featuring videos, quizzes and calculators

Options Clearing Corporation (OCC) – education

Questrade

• Options pricing
• Options margin