Most stocks will give you a 10% yield if you are really lucky. This is not a bad thing. But all the same, it leaves a bad taste in your mouth, whether you are a new trader or an experienced one, 10% growth every day, or week, or month is not the winning lottery ticket many people want out of the market.
For that reason, they turn to options trading. Options trading is related to the trading of stocks (also known as shares) on the stock market. It is an entirely different kind of security, however, which means that it follows its own rules. This means it is different on the macro scale, as well as the microscale.
But we’re getting ahead of ourselves. Before we drown in lingo and analysis, let’s talk about what an option is. What does it do? Why is it valuable? And perhaps most importantly, how is it traded?
Imagine buying stocks like buying a meal from a restaurant. Meals are important, so you know that you can find a buyer for the meal if you want to sell it. You can hold onto it if you want to see its price change first, and you can break it into smaller pieces if you want to sell it in a creative way.
Now imagine buying options as reserving a table at a restaurant. A lot of people want a table at a fancy restaurant. But the reservation only lasts for so long. After a certain date, you have to buy the table or sell the reservation. And no matter how enticing the reservation, the restaurant can always burn down.
This metaphor is more one-to-one than you think. A stock option means that you do not buy a stock. You buy the option to buy a stock. That option expires at a fixed date. This means that as the supply of and demand for the stock changes, the price of your option will change dramatically in turn.
We mentioned supply and demand. Let’s expand on that, as it is the primary reason why a stock option gets more or less valuable. First, consider what happens if there is less and less of a stock available.
If a stock is cheap and people are expecting it to get more expensive, then they are going to buy it so they can sell it later. But as more and more people make this purchase, the stock will get harder to come by. Everyone who wants to buy it will begin to worry how much value they’ll miss if they don’t buy now.
The harder the stock is to buy, the more valuable your option gets. The potential price of the stock contributes heavily as well. But where the value of the stock makes the option’s price rise linearly, the rarity of the stock makes the stock’s price rise exponentially. Of course, the opposite is true too.
Imagine you paid a lot for a stock option (generally a bad idea to begin with but imagine). The deadline for the option approaches. It has been rising more and more as the underlying asset (the stock) gets more and more rare and cheap. But then, the company does something unexpected. They release stock.
Companies can do this whenever they want. They generally don’t, as they know how upsetting it can be to the market. But if they do, your stock option’s value turns into a decimal percentage of what it previously was. This situation is highly exaggerated, but the thing is that no single part of it is unlikely.
If someone starts to sell all their stock early, then your option will fall in value. If events within the stock’s industry indicate the price will not go up soon, your option will fall in value. In short, there are a lot of things outside of your control that can make your option a liability that loses you money.
And that is the big risk of options: With normal stocks, you can hold onto the shares for as long as you want to get your money back. But with options, they expire eventually. It is high risk, high reward.
Now, with all that out of the way, let’s talk about the best options trading platforms in Canada.
Interactive Brokers is not just one of the best options trading platforms in Canada. It is also one of the best trading platforms in the world.
It connects to markets in North America, Europe, Asia, and even Oceania countries. This wide reach gives you access to just about any stock you can imagine.
Its website is deep with information on how options work, what to look for in an option, and how to get the most value out of them. It also has research tools for growing your understanding of a specific company, as well as the greater industry they are a part of.
They also have their own desktop trading app called Trader Workstation. It is known for having an incredibly customizable interface. Whether you want to see your own portfolio, the trends of the stock market, or news stories from around the world, the app lets you sort it out yourself.
Of course, not everyone wants a huge marketplace with a highly customizable interface and layer upon layer of research to learn from. Some people want their trading to be much more simple than that.
Interactive Brokers is a super complicated platform. This benefits options traders, since options trading is equally complex if you want to do it safely. But the truth is, not everyone wants to trade options like that. Options trading is known for being risky and rewarding. Some people just want to get lucky.
Interactive Brokers gives you everything you need to trade intelligently. But if you do not want to deal with its interface or complexity, then it will definitely get on your nerves real fast.
There are a lot of ways a trading platform can establish trust. When it comes to trading options, it is more important to seek out a trustworthy trading platform than with almost any other security.
When you think about everything we have mentioned about options up until now, you can probably guess why. They have a lot of potential reward, do not take many factors into their value, and they are highly appealing to people as a “get rich quick scheme”. Some brokers prey upon these facts.
CIBC Investor’s Edge works a bit differently than other platforms. It is a trading platform built out of the biggest bank in Canada. This means that it has strict oversight and rules on how it offers its options to you. What does this mean for your option-buying power? Does it restrict you at all?
No, not nearly as much as you would think. It means that the options you can buy are limited to the North American continent, but most options you would want to buy are limited to there anyways.
What it really means is that the copious research that CIBC offers is the same research that they use internally. CIBC, like all banks, uses its customers’ money to make investments that grow that money. But while they deal almost exclusively with stocks, they allow you to deal in options.
This means you get to use CIBC’s top-of-the-line suite of news, research, and analysis tools to make the most intelligent trades you can. It also means that if you have a bank account with them already, then you can make your transfers quickly and easily. In short, it offers tons of security.
While customers of CIBC have a lot of incentive to use their trading platform, people who are not already customers do not. The main reason for this comes down to the platform’s commission fees.
The fees are about $7 per trade plus $1 per contract. This is pretty steep, especially for high volume traders. They have discounts for if you trade enough, but they are not huge.
The security provided by CIBC is great, but not everyone has the capital to cross this barrier to entry.
Options trading can be done in one of two ways. The first method is buying big, expensive options for big, expensive stocks. These are highly risky, since the expensive option for the expensive stock can suddenly drop to way below the price of the stock itself.
If you want to mitigate your risk, then you can also trade in smaller options for smaller stocks. The lower initial investment means that you can trade more carefully at every level, and trade in high volumes.
But there is a problem: Almost all options come with commission fees. These can chip away at your profits. And if you make bad trades, you can quickly lose your starting capital as well. Luckily, platforms like Questrade have programs for helping traders deal with exactly this problem.
Questrade offers several methods of lowering the commission fees. You can either pay monthly for a fixed plan, which cuts the commission fee per trade in half. Or you can opt for the variable plan, which lowers the commission fees relative to the amount you traded in the previous month.
In both cases you will also be getting a serious discount on the fee per contract. This makes it more than twice as efficient to trade high numbers of options at a given time.
Questrade is easy to use, but lower commission fees are not the only thing it charges you for. Its research and analysis tools are both locked behind a paywall. This will turn lots of people off.
Of course, you can just go elsewhere for your research materials. But if your banking and research are done elsewhere, then you might as well use learning and analysis tools from other platforms. And then at that point, you are barely using Questrade for anything more than executing trades.
We have mentioned “research tools” a couple of times. But just what does that mean?
Research tools can mean anything as simple as the news, to something as complicated as analyst predictions about what the newest market trends are going to be. But while that is the extent of most trading platforms’ research tools, some trading platforms go a bit further than that.
QTrade’s research tools go beyond that. They give you a testing platform. This is a unique tool that allows you to simulate how the stock market will go with a variety of metrics. You can use their built-in prediction and analysis, or you can mess with tons of different factors to make your own prediction.
They also have a reduced commission rate for active traders that applies automatically if you trade enough. You can also get this if you have more than $500,000 in assets in your account.
QTrade’s research tools are great, but it does not allow for instant trading unless you have $2000 in assets in your account. You can still trade if you do not have this much, but you will have to let your trades “settle” before you can use your money to trade again.
For high volume traders this can lower your revenue by disallowing you the ability to trade constantly.
While most trading platforms cater towards beginners these days, it is a bit different for options trading platforms.
There are many consumer protection laws in place that make it difficult for trading platforms to sell options to potential investors. But ease of trades is not the only way to attract beginner traders.
Scotia iTrade makes its app appealing to beginners in the world of options trading through two means. First, it makes the app easy to use. This does not just mean making trades easy to execute, though it includes that. It also means giving you search tools to look through different industries and indexes.
These make different stocks easier to find, and different options easier to move. But the second thing that Scotia iTrade does to appeal to beginners is offer instant options trading with no minimum account balance. Instant settlement is generally only allowed to people with large enough accounts.
But that is more a matter of safety for the platform than anything. Scotia iTrade allows it.
While Scotia iTrade takes on a bit of risk by allowing for instant settlement of options trading, they mitigate that risk with higher-than-usual commission fees. They do have a frequent trader discount, but you have to be using the platform for a certain amount of time to get that discount.
In short, you have to deal with a larger commission fee for a while no matter what. And ironically, the trade-off of the speed of instant settlement and the cost of higher commission fees means that while the platform is beginner-friendly, it presents you with a beginner unfriendly trade-off to consider.
As mentioned before, making many, small investments is a far better way of trading options than trying to make huge call-outs. But small investments run into the problem of mandatory commission fees.
National Bank Direct Brokerage has a solution for this commission fee problem. You see, normally commission fees just stack and stack and stack. If it costs you $5 per trade and $1 per contract, then a single trade of 15 contracts will cost you $20. A single trade of 100 contracts will cost $105.
What National Bank Direct Brokerage does is cap the cost of any given trade at $20. That means a 15 contract trade and a 100 contract trade will cost the same. The question then becomes: How often will you profit from this discount? Well, the answer might surprise you.
The truth is that this is one of the few trading platforms that gives you incentive to change the way you trade. With enough foresight, you can plan out your options trading well in advance. Basically, you can try your best to consolidate all of your trading to a single, expensive day.
Then, the rest of the month becomes a matter of profiting off of that huge volume of trades. There are many people who trade like this already as well, making this platform perfect for them.
Being one of the largest banks in Canada, National Bank is primarily focused on stocks and the trading of the various securities that grow off of them (like options, but also CFDs). The trouble you might face is that the scope of their market is limited. It still connects to the New York Stock Exchange, but barely.
You will not be able to access all the stocks in the world with National Bank Direct Brokerage.
Technically speaking, many of the platforms that we have mentioned are actually brokers. These brokers all have their own platforms, so you can generally conflate the two without speaking inaccurately.
TD Direct Investing has four different platforms, all of which serve different purposes. The advantage this brings is that its differing platforms all appeal to differing levels of skill. They give you WebBroker, TD App, Advanced Dashboard, and Thinkorswim, though Thinkorswim is restricted to US users.
WebBroker and TD App both handle different kinds of analysis—technical analysis and fundamental analysis respectively. Advanced Dashboard is used to look at your own finances to see the different ways you can optimize your trading strategy.
Each app provides a ton of information on how to trade without the functions getting in the way of each other.
Naturally, having four different platforms that are all providing you with different information can get complicated. And it can, however much the information being walled off helps you organize it.
TD Direct Investing also has a rather complex commission system. It has a fee for opening an account, the normal fees for making trades, and additional fees for every contract in that trade. You can get a reduced rate for high activity, but it does not lower the fees by that much.
In the end, TD Direct Investing is a lot better for beginners in practice that it sounds like on paper. Just be sure to read the fine print to avoid inactivity fees and other small charges to your account.
Nobody is under the impression that Canada’s economy is larger than that of the United States’ (even if the United States’ economy is more tumultuous).
If the US is an oyster, the New York Stock Exchange is the pearl inside it. Getting that pearl out is oftentimes a matter of going to the right trading platform.
BMO Investor Line has access to United States stocks like no other broker before it. And this does not just mean for stock trading, but also options and CFD trading as well. This means that there are trades you simply cannot make anywhere but with BMO Investor Line.
They also have the professional research tool MarketPro, as well as a reduced rate for high volume traders. This helps bridge the gap between Canadian and US stock market rules.
Of course, the bridge is not without its flaws. The US stock market is hard to get to for a reason: Many of the trades you can make there violate Canadian consumer protection laws. This does not mean it is illegal to make the trades, just that no Canadian broker would be allowed to facilitate them.
The real drawback that this points to is the risk inherent to dealing with US stocks.
Stock market tracking is a finicky thing. Most stocks are going to be tracked every five minutes, though some will be updated even less frequently than that.
Others, however, can be tracked every minute. The most high-activity stocks, like Amazon and Tesla, are tracked down to the millisecond.
The value of this tracking is that it can mean the difference between making a trade for a disproportionately high price and a normal price. You can only find the most valuable moment in an option’s price history if you can actually see every single moment.
Consider how much money is spent on internet infrastructure between continents. There are millions of dollars of fiber optic cable laid between the New York and London stock exchanges, with millions of dollars more being added every year.
Why is this? Because even if they make trading happen 10 milliseconds faster, that adds up over all of the trades being executed all over the world every day. The same applies to RBC Direct Investing’s tracking. It can let you observe, respond, and execute market actions more quickly.
RBC Direct Investing is a bank-based trading platform that not only offers millisecond-tracking on more than 2,000 different stocks. It also offers moment-to-moment commentary and insight into the activity going on during a given trading day.
Sadly, RBC Direct Investing does not have enough other features to entice someone to move all of their banking over to the Royal Bank just to trade with them. An RBC account is required for trading, and while it is easy to get one, not many people will enjoy the process just to trade with them.
Millisecond tracking is good, but it presumes that you are watching and able to respond to a stock price every millisecond. This is more true for a stock trading bot than a person. Most of the time, people make their trades, options or otherwise, knowing exactly where a stock will go in advance of it being there.
“No commission fees” is a phrase that feels like water in the middle of the desert when it comes to options trading. Wealthsimple is a trading platform that deals with both Canadian and US companies.
It also gives you access to a robo-advisor to help you make the best trades you can, and an easy-to-use app. Altogether, this is a suite of tools that is perfect for someone who wants to build a portfolio without being nickel-and-dimed out of their capital by commission fees.
It is worth noting that most people set their trades up as recurring investments, even among options traders. This means that for most people, a limited number of stocks to choose from is not a problem.
No one actually sifts through all of the stocks on a massive market to find the one diamond in the rough to option for a fortune. It is not that people are too lazy to do that work. It is just that the work in question does not actually yield as much as just making consistent profits off a single stock’s options.
All of this combines to make a highly welcoming platform for both beginners and advanced users. Advanced users in particular will be happy to hear you can turn the robo-advisor off.
Wealthsimple’s lack of commission fees extends towards options trading, but you would be forgiven for thinking that they do not offer options trading at all. This is because in order to mitigate the risk of no commission fee option trading over the US border, Wealthsimple can’t offer many stocks as options.
This lack of options for your options turns a trading platform that is otherwise one of the best in the business into a highly limited tool. While cheap, it will only allow you to make certain trades.
We stuck this one very last for reasons that are probably immediately obvious: It is options trading on crypto rather than stocks.
Why is that an issue? Well, because crypto is not as tightly regulated as stocks, and crypto options even moreso. But that does not mean they are untradable.
Cryptocurrency gets its value from the “blockchain”. The blockchain is a network of applications between devices running the applications in which each application is continually validating the location, history, and transactions of each token of a given cryptocurrency. This is complicated, but important.
This affords crypto its own in-built protections against fraud, as no real trade can happen without the blockchain being there to validate it. But those protections cannot be extrapolated out to options.
You need a reliable trading platform to trade Canadian dollars for bitcoin, or Canadian dollars for bitcoin options. Bit.com is the best crypto trading platform in Canada that also offers options, as it brings together tons of different cryptocurrencies for you to speculate on.
It also allows for instant settlement of trades, making trading fast and easy.
The first thing we mentioned was the danger of fraud, and that is very much something you should be thinking about. Bit.com does everything it can to secure you against fraud. But when crypto fraud happens, it does not happen as a result of an unsecure currency or platform.
Crypto fraud happens away from these things. It happens because people do not know that you need these things in order to ensure that your trades are secure and fair. So, use it with both eyes open.
Now that we have the best trading platforms out of the way, let’s spend a bit of time talking about the risks of options. The word “risk” comes up a lot in the discussion of options, but it is easy enough to say that it is risky. You can tell a child a stove is hot, but that does not mean they won’t burn themselves.
So, why are options risky? And what should one do about it?
When we described options earlier, we mentioned the fact that they expire after a certain amount of time. This is the main source of risk for two reasons. The first is that it means you have to sell your options before they expire, even if it results in a net loss of your profits. This is well understood.
What people frequently forget, however, is that options do not always sell on their own once their time limit expires. It is totally possible for your option to expire unsold when you would have made a profit had you sold it. You have to remember to sell it, or at least place a sell order, or lose even more money.
Imagine you buy an option for $5, and its value drops to $1. That sucks, but if you do not sell that option, then you do not lose $4. You lose $5. Simply put, the interface of most platforms will not protect you from this.
There are a few rules you can follow in order to help stemmy the risk of trading in options.
The first is the oft-referred-to “2% rule”. This is a rule used in both real estate and stock trading. In stock trading, it means that an investment can be considered risk-managed if you do not contribute more than 2% of your total capital to it. So, if you have $100 and you buy a $2 option, this is not a risky investment.
Even if that $2 option goes down to a decimal of one cent, it represents such a small loss that it is not highly consequential to your finances. And perhaps more importantly, it does not disprove your investment strategy either. It does not take much market force to ruin an investment that small.
The second rule to remember is the “10% growth rule”. This rule is focused on options trading, and encourages investors to think of most of the money they make as income, not growth.
Imagine you have $100 in capital and spend all of that $100 on options and end up making $10,000. This is, in a few ways, a best-case scenario. So, what do you do after that? How much of that $10,000 do you invest in options? The 10% growth rule says you only reinvest 10% of the money you make.
So, rather than immediately bet all $10,000 trying to hit another payday, you instead invest $1,000. And even then, you do not put all $1,000 on the same option. Combine this rule with the 2% rule and you have yourself only investing $20 at a time. This creates an extremely low-risk portfolio of options.
And remember, all of this risk management is done without even thinking about the options you are buying. Managing risk is not about picking the right options to buy. All options are risky. Some good ideas will turn out to be bad ideas, and some bad ideas will turn out to be amazing paydays.
Building a good strategy around making money with options (or any securities trading, really) is not a matter of perfectly predicting when they will go up and down (though that can help). It is a matter of consistently managing the risks of your investments so that, over time, you make more than you lose.
No matter where you go to do your options trading business, remember: Options are risky. You will find more stories of people losing all of their earnings due to options than any other type of security.
Of course, that works both ways. Because options are so risky, you will also hear more stories of people reaching financial security due to them as well. But don’t go in treating them like lottery tickets. Treat them like you would any other investment: There are risks. There is information that helps mitigate risk.
If you read up on the stock you are optioning, keep track of the market, stay up to date on world events, sell when you are ahead, and do not contribute more than 2% of your capital to any given trade, then you will be able to make money without risking much.
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