Options trading has become increasingly popular among do-it-yourself investors, especially younger participants seeking the potential for quick, sizable gains. While easier access and lower fees have democratized an area once dominated by professionals, experts warn that options can be risky and are not suitable for everyone.
What is an option?
An option is a contract that gives the holder the right, but not the obligation, to buy or sell a security at a specified price, known as the strike price, on or before a set expiration date. Options are available on individual stocks, stock indexes, commodities and other securities. They trade on regulated exchanges and can be accessed through both full-service brokers and self-directed investing platforms.
Glossary note: An option’s price is called the premium. That premium reflects multiple factors including the current price of the underlying security, the strike price relative to that price, implied volatility and the time remaining until expiration.
Why are options popular right now?
Options trading has surged in recent years, driven by greater social-media discussion, increased market volatility and the rise of low-cost online brokerages. The pandemic accelerated the trend, as more people had the time and interest to trade from home. A report from the World Federation of Exchanges found options trading grew by 89.4 percent in 2023 compared with the prior year.
Online forums and social platforms often spotlight dramatic success stories, which can make options trading seem especially appealing. Josh Sheluk, a portfolio manager at Verecan Capital Management, notes that many people hear about large wins posted on sites like Reddit and assume they can replicate them quickly. That perceived upside, combined with lower trading fees on many platforms, has attracted a broader audience to options.
But Sheluk cautions that these trades carry significant risk. “I don’t think many of the do-it-yourself investors truly understand how much risk they’re taking with options trades,” he said. Because options require not only a correct market direction but also the correct timing, even experienced professionals find them challenging.
What can you do with options?
Options are derivatives whose value depends on the price of an underlying asset. They allow investors to take directional bets on whether a stock or other asset will rise or fall within a defined time period. Options contracts sit between two parties, and there are two primary types: puts and calls.
What is a put option?
A put option gives the holder the right, but not the obligation, to sell the underlying asset at the option’s strike price before the option expires. Puts are used by investors who expect an asset’s value to decline, and they are available on stocks, indexes, currencies and other instruments. The cost to buy a put is the premium, which fluctuates with market conditions and time to expiration.
Quick reminder: Buying a put can limit downside for an investor who owns the underlying asset, while selling a put exposes the seller to the obligation to buy the asset if the option is exercised.
What are call options?
A call option gives the buyer the right to purchase the underlying asset at the strike price before expiration. For example, if a stock trades at $50 per share, an investor might buy a call with a $55 strike, betting the stock will exceed $55 before the option expires. If the stock rises to $60, the call holder can buy at $55 and immediately benefit from the difference, less the premium paid.
Conversely, the seller of that call would have to provide the shares at $55 if the buyer exercises the option, potentially taking a loss if the market price is higher. In short, calls are bullish instruments that offer leveraged upside for buyers and potential obligations for sellers.
Where can you trade options in Canada?
Options are available through many Canadian brokerages, including both traditional banks and discount, app-based platforms. Lower commission structures and simplified order systems have made options more accessible. Some platforms advertise very low per-trade costs, which can encourage higher participation among inexperienced traders.
However, reduced fees do not change the underlying risk: options can expire worthless, meaning the buyer can lose their entire premium. Sheluk points out that predicting not only the direction of a stock but also the timing of the move is extremely difficult, even for professionals who focus on markets full time.
Who should trade options?
Options trading suits investors who understand the mechanics, the risks and how options integrate into an overall portfolio. Bilaal Dhalech, a finance content creator and self-taught options trader, advises beginners to learn first and to use small amounts of capital to practice. “Many young investors start with as little as $50 or $100,” he said. “There’s still risk, but for most people that amount is manageable as a learning investment.”
Dhalech recommends mastering long-term investing basics before moving into options and practicing with simulated trades or “paper” accounts to learn how outcomes play out. Tiffany Woodfield, a senior financial adviser at Raymond James Ltd., agrees that options are complicated and not for everyone. She recommends setting clear limits on how much capital you are willing to lose and running scenarios to understand potential outcomes before risking real money.
In summary, options offer powerful tools for hedging, speculation and income generation, but they demand a clear grasp of strategy, disciplined risk management and realistic expectations. Investors who prepare, study and stay within personal risk limits are more likely to avoid costly mistakes in this fast-moving corner of the market.