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Options trading in Canada
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Options trading in Canada: Strategies, risks and how to get started

Money.ca / Money.ca

Noel Moffatt

By Noel Moffatt

🗓️

Updated: December 03, 2024

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Options trading can significantly amplify your investments by using contracts that grant you the right — but not the obligation — to buy or sell assets, such as stocks or ETFs, at a predetermined price (known as the strike price) within a specific timeframe.

It’s actually a bit like making a reservation at your favourite restaurant — you don’t have to go, but if you do, your spot is guaranteed.

Key takeaways

  • Options trading involves contracts that allow investors to buy or sell assets at predetermined prices, offering leverage and flexibility while also presenting significant risks
  • Key strategies for beginners include buying calls and puts, along with covered calls and protective puts, each catering to specific market expectations and risk management
  • Effective risk management techniques such as setting stop-loss orders, diversifying strategies and monitoring market conditions are essential for navigating the complexities of options trading

The two main types of options

  1. 1.

    Call options: Picture this — you're betting a stock is going to blow up, but you don’t want to buy it outright. A call option lets you lock in a price to buy it later, so if the stock price skyrockets, you can swoop in and grab it for cheaper.

  2. 2.

    Put options: This one’s for when things are looking grim. If you think a stock's value will drop, a put option lets you sell it at a higher, pre-agreed price. It’s like a safety net for your portfolio when the market gets shaky.

How do options actually work?

Think of options as a deal between two parties — the buyer and the seller:

  • The buyer pays a premium (like a fee) for the right to decide whether to act on the contract
  • The seller collects the premium but has the obligation to follow through if the buyer exercises the option

Each option usually covers 100 shares, which can multiply both your potential gains and losses.

Key terms you need to know:

  1. 1.

    Strike price: The magic number where the option becomes profitable.

  2. 2.

    Expiration date: Your deadline to decide — use it or lose it.

If the market moves in your favour, you could see serious profits. But if it doesn’t? The worst-case scenario is you lose the premium you paid upfront. It’s a risk-reward dance, and it’s not for the faint-hearted.

Options trading can be a powerful tool in your investing toolkit — whether you’re looking to protect your portfolio, earn some extra income or bet big on market moves. Just make sure to study the rules before jumping in.

Key options trading strategies

Options trading is like playing chess with your investments — it’s all about strategy, timing and sometimes, a little patience. 

Whether you’re new to the game or just brushing up, here are some go-to options trading strategies broken down into simple terms. 

I’ll also throw in real-life examples to show you when these moves might make sense.

  • 1. Buying calls (long calls)

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    What it is: Think of this as betting on a stock to go up without actually buying it outright. You acquire the right to buy an asset at a set price (strike price) before your contract expires.

    When to use it:

    ◦ You’re confident the stock price will shoot up soon

    ◦ You want to maximize your returns without committing too much cash upfront

    Example

    Let’s say Stock XYZ is trading at $50 and you’re sure it’ll jump to $60 soon. You buy a call option with a $55 strike price for a $2 premium. If the stock does hit $60, you’ve made $3 per share ($60 - $55 - $2). That’s a 150% return on your $2 investment, compared to the stock’s mere 20% gain.

  • 2. Buying puts (long puts)

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    What it is: This is the reverse of a call — it’s your power move when you think a stock’s going to tank. A put option lets you sell an asset at a set price before the expiration date.

    When to use it:

    ◦ You’re bracing for a stock price drop

    ◦ You want to hedge (fancy word for protect) against losses on a stock you own

    Example:

    Stock ABC is at $100, and you suspect it’s about to nosedive. You grab a put option with a $95 strike price for a $3 premium. If the stock tumbles to $85, you pocket $7 per share ($95 - $85 - $3). Not only did you sidestep the loss, but you also came out on top.

  • 3. Covered calls

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    What it is: This one’s a two-in-one deal: You sell a call option on a stock you already own. You collect a premium for selling the option but agree to part with your shares if the price shoots past the strike price.

    When to use it:

    ◦ You’re okay capping potential gains in exchange for guaranteed income

    ◦ You’re sitting on shares you don’t mind selling if the price jumps

    Example:

    You’ve got 100 shares of Stock DEF at $40 a pop. You sell a call option with a $45 strike price for $1 per share. If the stock doesn’t hit $45, you keep the premium. If it rockets past $45, you sell your shares but still walk away with a tidy $6 per share profit ($5 gain + $1 premium).

  • 4. Protective puts

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    What it is: This is like insurance for your stocks. You buy a put option to shield yourself from major losses while still keeping the potential for gains.

    When to use it:

    ◦ You own a stock and want a safety net

    ◦ You’re all about protecting your portfolio from market surprises

    Example:

    You own 100 shares of Stock GHI, currently at $70. To play it safe, you buy a put option with a $65 strike price for $2. If the stock dives to $60, your loss is limited to $7 per share ($70 - $65 + $2), instead of a $10 hit without the put.

Matching strategies to your goals and risk tolerance

Not every options trading strategy is a one-size-fits-all solution — it’s all about finding the approach that aligns with your goals and comfort level with risk. 

Here’s a quick breakdown to help guide you:

  • Risk-averse? Protective puts can provide peace of mind, acting as a safeguard for your investments
  • Looking for steady income? Covered calls could be a great way to generate consistent returns on stocks you already own
  • Ready to take bigger risks? Long calls or puts let you make bold moves with relatively small upfront costs

Before jumping in, consider the following:

  • What’s your outlook on the market? Are you expecting significant price movement, or is the market looking steady?
  • How much risk are you comfortable taking? Options can be powerful, but they come with varying levels of risk.
  • What’s your ultimate objective? Are you looking to hedge existing investments, earn steady income, or capitalize on market swings?

The key is to start slow, make small trades and focus on learning. Options trading isn’t about quick wins — it’s a strategic process that takes time to master. Approach it with patience and you’ll build confidence as you go.

Choosing the right options trading platform

Choosing the right platform for options trading can make all the difference, whether you’re a beginner dipping your toes in or an experienced trader fine-tuning your strategies. 

Below, we’ll break down three popular platforms — Wealthsimple, Questrade and Webull — covering their features, fees and what type of investor they’re best suited for. Let’s dive in.

Wealthsimple options trading

Wealthsimple logo
Key features
  • A clean, intuitive trading interface that simplifies concepts like calls, puts and strike prices
  • Low contract fees starting at USD$0.75 for premium users
  • Currently mobile-only for options trading, though desktop functionality is reportedly on the horizon
  • Margin trading is available, offering competitive rates for those looking to boost their purchasing power
  • Trade options within TFSAs, RRSPs or personal accounts

Wealthsimple is the go-to platform for beginner investors, thanks to its straightforward design and beginner-friendly features.

It's a great platform for beginners because it offers step-by-step guidance in the app that makes learning easy while you trade and its Access to educational resources covering essential topics like the Greeks1 and tax considerations

The downsides are that its limited to basic strategies like long calls and puts and options trading is only available on mobile for now.

It's best for new investors or anyone looking for an easy-to-use platform with plenty of built-in guidance.

Questrade options trading

Questrade logo
Key features
  • Options trading available on Questrade Edge Web and Desktop, with advanced options chains and support for multi-leg strategies
  • Fees start at $9.95 + $1 per contract, with discounts for higher trading volumes
  • Access to complex strategies
  • Customizable layouts for managing multiple strike prices and expiration dates

Questrade offers a robust, full-featured platform aimed at traders who want flexibility and advanced tools for complex strategies.

It's great for experienced traders because of its multi-leg strategies with detailed options chains and customizable tools. It also offers comprehensive educational resources to help traders master the platform.

Unfortunately, their higher fees can eat into returns for smaller-scale traders and the platform’s advanced tools may feel overwhelming for beginners.

It's best for intermediate to advanced traders seeking robust features and the ability to execute advanced strategies.

Webull options trading

Webull logo
Key features
  • Zero commission on stock and ETF options; $0.55 per contract for index options
  • Advanced tools like probability analysis, customizable strategy builders and options chains
  • Up to four levels of trading permissions, including naked options for margin accounts
  • Paper trading for risk-free practice
  • Available across mobile, web and desktop platforms

Webull is all about keeping costs low while delivering a powerful suite of tools, making it a top pick for active traders.

It's great for all levels of traders because its low-cost trading makes it accessible for smaller portfolios. Their tools like an options calculator and screener simplify complex strategies, and they have free Level 2 market data for active traders.

Sadly, Webull's advanced features may overwhelm absolute beginners and their educational content isn’t as thorough as Wealthsimple or Questrade.

It's best for cost-conscious active traders who prioritize powerful tools and minimal fees.

Your ideal platform depends on where you are in your trading journey:

  • Beginners: Wealthsimple’s intuitive interface and educational tools make it a great place to start
  • Intermediate traders: Questrade’s advanced features and support for complex strategies offer more room to grow
  • Active traders: Webull’s low fees and powerful tools deliver the best value for frequent, cost-conscious traders

Regardless of the platform, always take advantage of paper trading to test strategies risk-free. A little practice can go a long way toward helping you navigate the market with confidence.

Risks and rewards of options trading

Options trading can offer unique advantages, but it’s not without its complexities. If done right, it can be a powerful tool for your portfolio. If done poorly, well, let’s just say it’s not forgiving.

Let’s break it down: The advantages, the risks and how to approach it wisely.

1. Leverage for bigger gains

Options give you the ability to control a larger position with a smaller upfront investment, thanks to something called leverage. In simple terms, this means your potential returns can be significantly amplified without requiring a hefty amount of cash.

Example: Instead of spending $10,000 to buy 100 shares of a stock, you could purchase a call option for $200. If the stock price rises, the percentage return on your $200 investment could be much higher than on the $10,000 you’d have spent on the stock.

2. Hedging against risks

Think of options as an insurance policy for your portfolio. By purchasing protective puts, for instance, you can safeguard against significant declines in an asset’s price.

Example: If you own a stock but are concerned about a potential short-term drop, buying a put option can lock in a minimum selling price. This ensures that, no matter what happens, your losses are limited.

3. Strategic flexibility

Options allow for a wide range of strategies that work in bullish, bearish or even neutral markets. Whether you want to generate income through covered calls or speculate on price movements, options give you the tools to tailor your approach to the market.

1. Total loss of premium

Options come with expiration dates, and if the market doesn’t move in your favour by that deadline, you could lose the entire premium you paid.

Example: Imagine you spend $150 on a call option. If the stock price does not exceed the strike price by the expiration date, your $150 is gone. It’s a high-risk, high-reward scenario.

2. The danger of writing options

Selling uncovered (or “naked”) options can expose you to significant — and potentially unlimited — losses. If the market moves against your position, the financial fallout can be severe.

Example: Selling a call option without owning the underlying stock might seem like a good idea until the stock price skyrockets. You’d then have to buy the stock at the higher price to fulfil your contract, leading to substantial losses.

3. Complexity and steep learning curve

Options aren’t as straightforward as buying and holding stocks. Terms like Delta, Theta and Gamma (collectively known as the Greeks) are crucial to understanding how options behave, but they can be intimidating to newcomers. A lack of knowledge or misjudging these factors can lead to costly mistakes.

Pros and cons of options trading

Pros

Pros

  • Leverage: Amplifies returns with smaller investments

  • Hedging: Protects against price declines

  • Flexibility: Suits bullish, bearish, or neutral strategies

Cons

Cons

  • Total loss: Entire premium can be lost

  • Unlimited losses: Risky when selling uncovered options

  • Complexity: Requires advanced knowledge (e.g., the Greeks)

3 tips for managing risks with options trading

1. Only trade what you can afford to lose

Treat options trading as a high-risk investment. Never put money on the line that you’re not prepared to part with.

2. Start with paper trading

Before jumping in with real money, practice using simulated accounts. This gives you a risk-free way to test strategies and get a feel for market movements.

3. Commit to continuous learning

Options trading is a skill that requires ongoing education. Make use of webinars, tutorials and other resources to keep improving your understanding and strategies.

Is options trading right for you?

Before diving headfirst into the world of options trading, take a step back and ask yourself: Is this the right move for your financial situation, knowledge and tolerance for risk? 

To help you decide, I’ve put together a checklist to gauge your readiness.

1. Financial stability

First things first: How’s your financial foundation? Options trading can be exciting, but it’s not where you want to start if you’re still patching up your safety net.

  • Got an emergency fund2 to cover three to six months of expenses?
  • Free of high-interest debt (credit cards)?
  • Have some “play money” that you can afford to lose without losing sleep?

2. Risk tolerance

Let’s not sugarcoat it: Options trading isn’t for the faint of heart. There’s real risk involved, and you’ve got to be okay with that.

  • Can you stomach the idea of losing your entire premium?
  • Are you comfortable with market swings and the complexity of options?
  • Do you understand that certain strategies, like writing uncovered options, could lead to big losses (potentially unlimited)?

3. Investment knowledge

Be honest — do you know what you’re doing, or are you just hoping to figure it out on the fly? Options trading isn’t something to wing.

  • Do you understand key terms like strike price, expiration date, and even the Greeks?
  • Are you familiar with basic strategies like buying calls, buying puts and covered calls?
  • Have you already dabbled in investments like stocks or ETFs?

4. Market understanding

To trade options, you’ve got to have a pulse on the market. Otherwise, it’s like playing darts blindfolded.

  • Do you follow financial news and understand how things like economic data or company performance influence stock prices?
  • Can you research and analyze assets to make informed decisions?
  • Do you know the difference between bullish, bearish, and neutral markets?

5. Commitment to learning

Options trading isn’t just “set it and forget it.” You’ll need to put in some effort to get good at it.

  • Are you ready to learn about advanced strategies, risk management and market analysis?
  • Do you already read financial news or use simulators to practice trading?
  • Are you open to seeking advice or taking courses to level up your skills?

6. Support system

Finally, it’s easier to succeed when you’ve got the right tools and people in your corner.

  • Have you thought about consulting a financial advisor to see if options trading makes sense for you?
  • Do you have access to a mentor, community or resources to help you along the way?
  • Are you familiar with trading platforms that make managing risk easier?

What’s next for you now?

If you’re nodding along to most of these points, options trading could be worth exploring. But if you’re feeling unsure or not quite ready, here’s how to get started:

  1. 1.

    Educate yourself: Read articles (like this one), attend webinars and practice with paper trading accounts until you feel confident.

  2. 2.

    Talk to a pro: A financial advisor can help you craft a plan that works for your goals and risk tolerance.

  3. 3.

    Start small: Ease into it with simple strategies, like buying calls or puts and only use money you’re okay losing at first.

Options trading isn’t for everyone, but if you’re ready and informed, it can be a valuable tool in your investing arsenal. Take your time, do the homework and approach it with intention. 

FAQs

  • What is the difference between call and put options?

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    Call options allow the buyer to purchase an asset at a set price, whereas put options grant the buyer the right to sell an asset at that same price.

  • How does the strike price affect options trading?

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    The strike price is crucial in options trading as it dictates the exercise price of the option, significantly impacting potential profit or loss based on how the underlying asset's market price relates to it. Thus, understanding the strike price is essential for making informed trading decisions.

  • What are the primary risks associated with options trading?

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    The primary risks associated with options trading include the potential for total loss of the premium paid, unlimited losses when writing uncovered options and the necessity for precise timing and a thorough understanding of the market. Engaging in options trading requires careful consideration of these risks.

  • How can I manage risks in options trading?

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    To effectively manage risks in options trading, implement strategies such as setting stop-loss orders, diversifying your options approaches and continuously monitoring market conditions. These practices will enhance your risk management efforts.

  • Are options trading profits taxed?

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    Yes, options trading profits are generally taxed as capital gains, and the tax treatment may vary depending on your holding period and trading strategy. It is advisable to consult a tax professional for guidance on your specific situation.

  • sources

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    1. https://www.researchgate.net/profile/Manu-Ks/publication/350037060_Role_of_Options_Greeks_in_Risk_Management/links/604c601792851c2b23c58797/Role-of-Options-Greeks-in-Risk-Management.pdf

    2. https://www.canada.ca/en/financial-consumer-agency/services/savings-investments/setting-up-emergency-funds.html

Noel Moffatt Writer

Noel Moffatt is a Canadian fintech expert with a passion for simplifying personal finance. Based in St. John’s, NL, he draws on his background in finance, SEO, and writing to deliver clear explanations and actionable advice. Noel is dedicated to equipping readers with the knowledge and tools they need to make informed financial decisions, striving to make personal finance more accessible and understandable through his in-depth articles and reviews.

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