What is an option?
An option is a contract to purchase or sell a security at a selected price, called Strike priceon or before the expiration date of the choice. Options can be found for people SharesStock indices, commodities and other securities. They are traded on stock exchanges and could be bought and sold each through brokers and on your individual Investment platforms.
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Why are options popular without delay?
Combined with more stock chatter on social media and market volatility, options trading has picked up steam amongst Canadian investors large and small. The trend really took off throughout the pandemic when many were stuck at home and has continued since then, with options trading increasing 89.4 percent in 2023 in comparison with the previous 12 months, a report from the World Federation of Exchanges shows.
Social media and online commentary have increased demand for options trading, said Josh Sheluk, portfolio manager at Verecan Capital Management. “People hear on Reddit how great someone did with a particular options trade, and they want to try to do the same thing and get very, very rich, very, very quickly,” Sheluk said. “It’s become very appealing.”
However, he warned that this kind of trading may be very dangerous for do-it-yourself investors. “I don’t think many do-it-yourself investors truly understand how much risk they are taking with options trades.”
What are you able to do with options?
Options – a derivative whose value is directly tied to an underlying asset or stock – allow investors to bet on how a stock will perform over a selected time frame. It is a contract between two investors. There are two sorts of options: puts and calls.
What is a put option?
Put options are derivatives. This signifies that their value is predicated on the worth of one other security, typically a stock. Puts are also available on currencies, indices and other assets. A put option, or put, is a contract that provides you the correct, but not the duty, to sell the underlying investment at a selected price, called the strike price, before the choice expires. The price of a put known as the premium and fluctuates depending on a lot of aspects, including the present stock price and the time remaining until the expiration date.
What are call options?
A call option gives investors the correct to purchase a stock at a selected price, and a put option is the correct to sell a stock at a selected price. For example, if a single stock is trading at $50 per share, an investor should buy a call option for $55 – thereby predicting that the stock will rise by $5 inside a certain time frame, Sheluk said .
“As a holder of that call option, you’re pretty happy if the stock price goes from $50 to $60, because you can now buy that stock for $55 when it would be $60 on the market,” he explained. This is not great for the choice seller because they must buy the stock at market value and sell it back at the choice’s strike price of $55.
Where to purchase call options in Canada?
If the stock fails to achieve the choice’s strike price, the whole investment is lost. A decline in options trading fees, particularly on DIY investment platforms, has also attracted young investors to the space. For example, on Wealthsimple, investors can trade options for as little as $1.
Major banks have also began reducing their options trading fees as competition increases between investment platforms. Last month, Bank of Montreal cut fees for options traders who make greater than 150 trades per quarter.
