Unless you’re a broker, you may not be familiar with options trading. But how many of you reading this right now can say you know Flo from the Progressive Commercials? Or that little gecko from the Geico commercials? (Didn’t see those two questions coming, did you?)
If you’ve ever bought insurance or even seen those commercials, you’ve got one foot in the door to understanding options trading.
In this article, we’re going to debunk the complexity of options trading. We’ll also take a look at Schwab, TD Ameritrade, and Fidelity options trading as well as provide some suggestions for how you might get started strengthening your investment portfolio by adding options trading to your investing repertoire.
Debunking the Complexity of Options Trading
Options give the buyer a right to buy (for call options) or sell (for put options) an underlying asset, usually shares of a company, at a specific price by a certain date.
Most options traders use options for purposes of price speculation. The investor has a “hunch” that the price of the stock will either rise or fall, and they make options trades accordingly.
Think of options as a tool used to manage risks. If you think the share price will go down, you can buy a put option and sell your shares to the option seller if the price goes down.
Put options give you the right to sell shares of an underlying stock at a specified price — called the exercise price. As the holder of a put option, you profit if the stock price stays below that exercise price.
Call options, on the other hand, give the options holder the right to buy shares at a specific price. If you hold call options, you profit when the stock rises above the exercise price.
This is the basic idea with trading options contracts. There is volatility in the stock market, and options help investors manage that volatility. Investors take risk, but with options trading, you’re willing to pay someone else to take on the risk for you. And the person who gets paid is willing to take on that risk.
With stocks, you either buy the stock if your outlook is bullish, or you avoid the stock if your outlook is bearish. And if you already own the stock, you might consider selling it.
With options, however, you can bet on the rise or decline of the stock price. You can also bet on volatility — how much you think the stock price will move.
Make sense so far?
Let’s look at an example. Say you bought your dream car. Maybe it’s a little red Corvette — like the Prince song. You spend $70,000. To protect this sizable investment, you buy insurance from Flo at Progressive.
Think of that $70,000 you spent as $70,000 that you’ve risked. Now compare that to buying 100 shares of XYZ stock if the stock price is $700 per share. That’s $70,000 spent (or risked) on XYZ stock.
When you trade options, you’re essentially paying someone else to take on your risk, similar to taking out an insurance policy on a new car. You’re buying a few extra shares to protect all 100 of them.
But the next question becomes, should you use a brokerage account and pay a big firm to handle your options trading strategies, or should you learn how to do it yourself?
What’s It Like Trading Options With a Broker Like Fidelity?
The first step is to understand what it’s like working with a brokerage services firm.
You may already have mutual funds, an IRA, or an online savings account from fidelity.com. But trading options with a big operation like Fidelity Investments can be a different story than banking online with your Fidelity account.
The top players in the industry charge fees. It’s very common for brokers to charge a per-contract fee for options trading.
Fees are not the only consideration. Be sure to also analyze the other features the broker offers.
We’ve done the hard work for you by examining the largest brokers and the user experience they’re offering options traders. We’ve evaluated each established brokerage firm using criteria that are important to individual investors like you, including trading commissions and the overall options trading experience.
Even though one particular brokerage house may be your favorite platform for trading stocks or exchange-traded funds, their options trading offering can often be a different story.
Fidelity Options Trading
Fidelity is striving to provide a customer-centric options trading experience with its Active Trader Pro platform. Active Trader Pro can be used on your laptop or as a mobile app.
Active Trader Pro provides the opportunity to trade options and access a variety of options analytics tools to assess your strategies before making the trade.
With Fidelity, investors can access nine different options markets on their trading platform. By clicking on the options page investors can access quotes, tools, market overviews with market commentary, scanners, charts, and more.
As of July 2021, options commissions are $0.65 per contract.
Charles Schwab Options Trading
Charles Schwab prices their options in line with Fidelity and provides fundamental research that helps investors with options investment strategy.
Another firm heavily focused on customer service and support, Schwab’s StreetSmart Edge platform is highly rated. The powerful suite of intuitive trading tools makes it easy to browse, analyze, and build your options trades.
Schwab’s interactive Trade & Probability Calculator helps you assess the potential risk, reward, and pricing scenarios of a trade before placing it. Plus, Schwab’s Walk Limit order system works your options orders for you — automatically adjusting the limit price across specified time criteria and price increments to obtain the most favorable execution price.
As of July 2021, options commissions are $0.65 per contract.
TD Ameritrade Options Trading
TD Ameritrade is a versatile broker. A solid option for investors looking to self-direct, TD Ameritrade offers a full suite of powerful tools and a customizable trading platform, thinkorswim.
The thinkorswim interface is intuitive, easy to navigate, and allows investors to create custom analysis tools. Investors can refine their options investing strategy with TD Ameritrade’s Options Statistics tool. You can look at the put-call activity to identify the potential direction of the underlying security. You can also inform your market predictions using the platform’s Sizzle Index to help identify if option activity is unusually high or low.
As of July 2021, options commissions are $0.65 per contract.
Becoming an Educated Options Trader Is Priority One
Although trading can be easy with any of the above-mentioned firms, the educational support can be frustrating at times. You may be looking to find information on the basics of options trading and you end up on a page outlining how to navigate the company’s website or when to take Social Security.
That’s why it is critical to take charge and become an educated options trader. There are several ways to do this.
Consider Your Risk Tolerance
What kind of risk can you afford to take with your trading portfolio?
This is an important question. Every options trading strategy has a pre-determined risk profile. Be sure to understand the profit potential and risks involved before executing any trades.
Consider Current Events
Current events can significantly impact the stock prices of underlying stocks, in addition to the price of the options contract itself.
These events might have a global impact on every market, or just a specific company or sector. It’s important to ensure that your expiration date coincides with the current event in your favor.
Take All the Help You Can Get
There are so many exceptional options trading resources available. Read everything you can. Talk to everyone who seems knowledgeable about trading options. And tap into the many resources like investor webinars that are available to you.
Get Started With Options Trading Today
Now you know what trading options with the major brokers is like and you know how important educating yourself is. Once you arm yourself with the proper knowledge, be sure to become a lifelong options-strategy student and keep building on that knowledge.
To learn more and find the best option trades that are right for your portfolio, subscribe to Investors Alley’s “Options Floor Trader PRO” newsletter.
