Where To Buy Options
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Where To Buy Options
As the significant increase in retail options trading has forced online brokers to compete even harder for customer business, it has spurred the development of some fantastic product innovations, deeper pricing cuts, and easier pathways to creating sophisticated options strategies. While tastytrade has some work to do to regain the rank it lost in our redesigned methodology, which gives the highest weighting to research amenities, its competitive commissions, options-focused content, and optimized options tools are strong enough to keep it sitting at our best overall pick.
One important feature of options to understand is that the risk for the buyer of a put or call option is limited to the amount of premium they pay for the option, while the seller of the option would have theoretically unlimited risk on a call (because the price can keep going up indefinitely). For the seller of puts, the option has risk limited to the stock price going to zero. Therefore, sellers of options, unless hedged, are usually exposed to significantly higher risk than the premium they received for the options.
Another important concept with options is the leverage they afford. An exchange traded option contract on a listed stock or ETF represents a contract for 100 shares of the underlying stock. Therefore, the out-of-pocket cost for a stock option is 100 times the price it is trading at because the contract is for 100 shares. Buying an option allows a trader to have control of 100 shares of stock by only laying out a small portion of the underlying value of the stock. For example, if a stock is trading at $100, to purchase one hundred shares would cost $10,000 ($100 x 100 shares). But, an option may only cost a few dollars per contract to control a large number of shares. A call option trading at $5 would cost just $500 (100 shares x $5 option premium) to control 100 shares of stock worth $10,000. So, there is a good deal of leverage associated with using options to speculate.
Once approved for options trading, the next step is determining if you want to use options to hedge or speculate, then to determine which options strategies are best for you. This is best accomplished by using an "option chain" or "matrix" that lists all the expirations and strike prices for a stock to help the trader choose the right option for their market expectations. Expiration dates can range from days to months to years depending on the liquidity of the underlying stock. Generally, the shorter the timeframe for an option, the riskier the option is because options are a decaying asset due to their having an expiration date.
While costs are one consideration when choosing an options broker and trading platform, there are other factors to weigh. If you are a new trader, it will be helpful to have a broker that offers substantial educational offerings, such as articles, videos, and webinars. Intermediate and advanced traders will want a robust trading platform and a full suite of options-specific trading tools and resources.
The commission structure for options trades tends to be more complicated than for stock trades. Until the commission cuts that swept the industry in the fall of 2019, most brokers charged a fee for each leg of an options spread plus a per-contract commission. The per-leg fees, which made 2- and 4-legged spreads expensive, have for the most part been eliminated industry-wide. We are also seeing some brokers place caps on commissions charged for certain trading scenarios.
The first and most important piece of information to consider before selecting an options trading account is what kind of trader you are. What is your trading style and risk appetite Which options strategies do you want to employ Do you want to hedge or utilize income strategies against a stock or ETF holding, or to speculate
Generally, the prices of most options are fairly priced, meaning the option you choose to speculate with is a personal choice. Some
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