investing
Introduction to trading options
August 15, 2018

Options are contractual agreements between two parties, buyers, and sellers. The buyer of an option acquires the rights, but not the obligation to fulfill the terms of the option contract by buying or selling a specified quantity of the underlying asset at a predetermined time in the future at an agreed upon price. On the other side, the seller of the option is obligated to fulfill the terms of the contract and complete the transaction if called upon to do so.

Financials that underlie option contracts include equities, equity indexes, interest-rate sensitive securities, currencies, and more. In this article, we will be focusing on equity options where we will assume each contract represents terms for 100 shares.

Sounds a bit complicated? No worries, we'll make things simple.

There are two types of option contracts:

Call optionGives the owner the right to buy a specified number of shares of the underlying stock at a certain price (strike price) up to the pre-determined expiration date.
Put optionsGives the owner the right to sell a specified number of shares of the underlying stock at a certain price (strike price) up to the pre-determined expiration date.

There are found basic option positions:

Type of actionCall optionPut option
Buyer (long position)

Pays premium (money) to the writer. Has the right to buy the underlying security at a predetermined price. Call buyer expects the price of the security to rise in value

Pays premium (money) to the writer. Has the right to sell the underlying security at a predetermined price. Put buyer expects the price of the security to decline in value
Writer (short position)

Receives premium (money) from the buyer of the call option. The writer has the obligation to sell the underlying security at the predetermined price, if called upon to do so (by the buyer of the call option). The call writer expects the price of the underlying security to stay the same or fall in value

Receives premium (money) from the buyer of the put option. The writer has the obligation to buy the underlying security at the predetermined price, if called upon to do so (by the buyer of the put option). The call writer expects the price of the underlying security to stay the same or rise in value


Generally, there are two option styles – American and European. An American option may be exercised any time before the expiration date, while a European option may be only be exercised at the expiration date. Almost all stock listen in Canada, and the U.S are American style options, while indices are typically classified as European options.

The first step to trading options is to ensure you have permission in your account. We provide four levels of option permissions, from level 1 (for the most basic options trading) through to level 4 (sophisticated, multi-leg strategies). You can verify your level (or change it) by logging in to your Questrade account. If you are opening a new account, select your option level after you indicate the type of account you’re opening.

  • Practical examples of trading options

    Now that you've learned the basics, let's learn by using some examples.

    Example 1 (long call options):

    Jackie has been researching XYZ stock for some time now and based on his findings he believes that the stock will significantly rise in value from the current price of $20 per share in the near future. Instead of buying shares of XYZ, Jackie decided to buy 1 call option on XYZ expiring in 12 months at a strike price of $25.

    10 months pass by and XYZ stock is trading for $27 per share. The option is in-the-money (see glossary).

    Now Jackie is faced with two choices:

    1. Exercise his rights on the option to buy 100 shares of XYZ for $25 per share (strike price) as opposed to the current market price of $27 per share and pay an assignment fee
    2. Sell the call option through a stock exchange. Since this call option has the right to buy stock XYZ at a lower price compared to the current market value, it has intrinsic value and therefore it will most likely sell at a profit

    Suppose Jackie was wrong in his predictions and the stock price declined from $20 per share to $15 per share by the expiration date. At that point, Jackie’s long call option would be considered out-of-the-money (see glossary), and it wouldn’t be in his best interest to exercise his rights as he wouldn’t want to pay $25 per share to buy XYZ when he can buy it at market for $15. In that case, the seller of the option gets to keep the premium that was paid by the buyer (Jackie) when he entered the contract.

    To conclude, Jackie is paying a premium to the call option writer to reserve his right to buy XYZ stocks at $25 per share in a future date, on or before the expiry date of the contract.


    Example 2 (long put options):

    Stu has been looking into FFF stock for some time now and based on his findings he believes that the stock will decline in value from the current price of $50 per share in the next 12 months. Instead of shorting shares of FFF, Stu decided to buy 1 put option on FFF expiring in one year from today at a strike price of $45.

    9 months passed by and Stu was right with his prediction, XYZ stock declined and it is now trading for $43 per share. The option is in-the-money (see glossary).

    Now Stu is faced with two choices:

    1. Exercise his option to sell 100 shares of FFF to the option writer at $45 per share (strike price) as opposed to selling FFF shares at the current market price of $43 per share. Since Stu did not hold any stocks, selling FFF shares to the option writer will create a short position in Stu’s account at $45 per share.
    2. Sell the call option along with its rights to a different investor in the market through a stock exchange. Since this put option has the right to sell stock FFF at a higher price compared to the current market value, it has intrinsic value and therefore can most likely be sold at a profit.

    Suppose Stu was wrong in his predictions and FFF stock increased from $50 per share to $55 a share by the expiration date. At that point, Stu’s long put option would be considered out-of-the-money (see glossary), and it wouldn’t be in his best interest to exercise his option rights as he wouldn’t want to sell FFF stock at the strike price of $45 when he can sell it at market for $55. In that case, the seller of the put option gets to keep the premium paid by the buyer.

    Plus index quotes: TSX indices, TSX Venture indices, Dow Jones Indices, S&P Indices.

  • Questrade Trading

    To place a basic option trade, follow the steps below:
    1. Log in to Questrade Trading
    2. In the top right corner, click Buy/Sell to open the order entry tab (insert icon)
    3. Enter the symbol or name of the underlying security you’re looking to trade
    4. In the symbol field, change STK to OPT to trade options
    5. Choose your option type (Single-leg, multi-leg, or custom options are available)
    6. Enter the details of your trade (See full explanation below)
    7. Click Buy or Sell
    Depending on your order entry preferences, an order confirmation window will appear. Review your order and when you’re ready click Send Order.

    User-added image


    Breakdown of the order entry tab:
    Order detailsDescription
    SymbolLookup the symbol or the name of the company of the underlying security you would like to trade and tap the snap quote button to get quotes in real-time data (applies to certain exchanges only)
    ExpiryDate at which an option owner can exercise their right to buy (or sell) shares of the underlying stock
    Strike pricePrice at which the option owner can buy (or sell) the shares
    QuantityNumber of option contracts the option owner will purchase
    Order typeSelect the type of order you want to use. To learn more about the different order types, click here
    DurationSelect a duration to specify how long the order should remain active. For more information about durations, click here

  • IQ Edge

    To place a basic option trade, follow the steps below:
    1. Log in to IQ Edge
    2. In the left corner, click Order entry to place an order
    3. Enter the symbol or name of the underlying security you’re looking to trade
    4. In the symbol field, change STK to OPT to trade single-leg options
    5. Enter the details of your trade (See table below for more information)
    6. Click Buy or Sell
    Depending on your order entry preferences, an order confirmation window will appear. Review your order and when you’re ready click Send Order.

    User-added image

    Breakdown of the order entry tab:
    Order detailsDescription
    SymbolLookup the symbol or the name of the company of the underlying security you would like to trade and tap the snap quote button to get quotes in real-time data (applies to certain exchanges only)
    ExpiryDate at which an option owner can exercise their right to buy (or sell) shares of the underlying stock
    Strike pricePrice at which the option owner can buy (or sell) the shares
    QuantityNumber of option contracts the option owner will purchase
    Order typeSelect the type of order you want to use. To learn more about the different order types, click here
    DurationSelect a duration to specify how long the order should remain active. For more information about durations, click here

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