Options Trading

If you're looking for the right online options broker, you'll want to pay attention to several factors, including commissions, ease of order entry, option trading tools, and options education to name a few. It also makes sense to choose an options broker with tools, education and research geared towards stock trading, ETFs, and other products.

How many kinds of options are there?

Many beginning investors know about equity options (also known as "stock options"). As the name suggests, these options are contracts that give the option buyer the right to buy or sell stock at a certain price for a certain period of time.

What many investors don't realize is that options exist on many underlying securities, from Exchange-Traded Funds (or ETFs) to index options and others. Exchanges like the Chicago Board Options Exchange issue new option contracts frequently to address the market's shifting demands - so chances are you'll find an option to help you trade almost any sector or industry you're interested in.

Anatomy of an option contract

Before you dive into trading options, make sure you understand the differences between puts and calls. You should also understand the basic information that makes up each option contract before trading options online.

A call option gives the buyer the right, but not the obligation, to buy the underlying security at a given price (called the strike price) for a given period of time. When that period of time is up, that's called expiration. The option ceases to exist after expiration.

Similarly, a put option gives the buyer the right, but not the obligation, to sell the underlying security at a given strike price for a given period of time.

Each standard option contract has a name that reflects the terms of that contract. Here's an example:

1 XYZ March 50 call @ $1.50

This call option is a contract that gives the buyer the right to purchase 100 shares of stock XYZ at $50 per share. The option contract can be purchased currently for $1.50 (that's also called the options premium, or price.) This option expires in March, usually on the Saturday after the third Friday of that month.

Of course, keep in mind that the option buyer doesn't have to exercise the right their contract gives them. For example, if XYZ's stock price stays below 50 - say, at 48 - there's not much incentive to buy XYZ at a price higher than the market price. But if XYZ rises to 52, suddenly the call buyer might be interested to exercise and buy stock for just 50. The call buyer may also trade the option to another buyer and not exercise at all.

Open a TradeKing account today

If you're looking for a top-notch online options broker, look no further. TradeKing is a nationally licensed online brokerage with a mission to help you become a smarter, more empowered stock and options trader. At TradeKing we offer the same fair and simple price to everyone - just $4.95 per trade, plus 65 cents per option contract. You'll trade at that price, regardless of how frequently you trade or the size of your account.

TradeKing also offers plenty of options trading tools, from options chains, Profit + Loss and Probability Calculators, an options scanner - plus a wealth of educational resources for both beginning and advanced options traders.

In August 2007, SmartMoney Magazine rated TradeKing the best discount online brokerage - a distinction we've earned two years in a row. SmartMoney's survey factored in many criteria: customer service, commissions, interest rates, mutual funds, investment products, trading tools, banking amenities, and research.