A lot of people have been talking about options and a lot of people have been talking about Canadian options. So, what is the difference between trading options in Canada and trading options on an American exchange like NYSE or a European stock exchange?
First, there are American options and European options, and their real defining characteristic is the expiration of the contract. You can buy American options and European options in America. There is no such thing, however, as a specific type of contract known as a Canadian options contract. You can, however, trade options in Canada and Canadian options trading has its own set of rules.
Second, if you want to trade options in Canada, the equity in questions has to be available on a Canadian stock exchange like the Montreal Exchange or the Toronto Stock Exchange. Questrade, for example, is an online broker and options exchange based in Canada where an active trader can make on options trade on the Montreal Exchange or the Toronto Stock Exchange. Qtrade and Scotia ITrade are also available.
In addition to dealing with a Canadian stock exchange like the Montreal Exchange or the Toronto Stock Exchange, trading options in Canada makes you more likely to invest in fine Canadian companies like Labrador Source. This Canadian-based water company provides every type of water: spring water, clean water, tap water, hot water and cold water. In addition to every type of water, the company provides the following: water coolers, water dispensers, bottled water dispensers, water bottles, 5-gallon jugs, 5-gallon bottles, large bottles and free delivery with storage at room temperature.
The Nature of the Options Trade
For those who do not understand exactly what an options trade is, it is contract to to buy or sell a tradable asset at a particular price, the strike price, by a certain expiration date defined in the contract, thus the difference between American and European options. This tradeable asset can be virtually any security: stocks, bonds, ETFs, mutual funds, currency, cryptocurrency and even commodities like coffee, tea, and gold.
There are two types of options traders in an options contract, the holder and the writer. Options contracts can be divided into two categories, call and put.
In a call option, the holder expects the asset to go up in the future, and therefore purchases a contract that will allow the holder to buy the asset at a predetermined price, the strike price. The writer is on the end of the options trade. If the asset moves above the strike price as the holder predicts, the options contract becomes valuable, the holder makes money and the writer loses money. However, if the asset moves below the strike price and does not recover before the expiration date of the contract, the contract becomes worthless and the holder loses money while the writer makes money.
In a put option, the holder is betting that the asset will go down in the future. Therefore, the holder purchases a contract that allows the holder to sell the asset at the strike price, with a guaranteed buyer. If the asset moves below the strike price, the buyer is obligated to buy the asset at a high price and the options contract becomes valuable and the holder makes money. If the asset moves above the strike price, however, since it is a put option, the contract becomes worthless and the holder loses money.
Traders should understand that commissions are also a cost of the trade. So, even if the options contract can be sold for a profit, the commission needs to be deducted from the profit.