Best Options Trading Brokers

What are options in trading?

Options are contracts that give the buyer the right (not the obligation) to buy or sell an underlying asset at a set price if it moves beyond that price within a set timeframe. They can be offered on any trading instrument, but they are more common in stocks, indices, and commodities among exchange-based brokers. Some forex and CFD brokers now offer options in forex too.

Options are usually classified into call and put options. With a call option, the buyer has the right to buy the underlying asset at the strike price on or before the expiration of the contract. It is a bullish position, so it profits when the price of the underlying rises above the strike price.

On the other hand, the buyer of a put option has the right to sell the underlying asset at the strike price on or before the expiration of the contract. It is a bearish position, so it profits when the price of the underlying falls below the strike price.

Why would I want to trade options?

Options are derivative products that have some unique features not found in other financial products. One of such features is that they are structured to have a pre-determined risk, so from the outset, you already know the maximum you can lose before trading, but this is only when you are on the buying side. On the selling side, the risk can be unlimited if the asset you underwrite continues to trend.

Another feature of options is that you cannot get a margin call or get liquidated — except, of course, for Turbo or Barrier contract types among forex options. Also, stock and indices options can be used to offset or fully hedge an existing position in equities. Some investors even use a combination of options to create highly specific trading strategies.

Options terminologies you should know

As an intending options trader, there are some key terminologies you should know. We have already mentioned some of them in this guide. The most important ones are as follows:

• Strike or Exercise Price — the pre-determined price level at which the contract would be exercised
• In the Money (ITM) — an option that possesses intrinsic value
• Intrinsic Value — the positive difference between the strike price and the underlying spot price
• Spot Price — the current market price of the underlying asset
• Out of the Money (OTM) — an option that has no intrinsic value, only extrinsic value
• Extrinsic Value — the negative difference between the strike price and the underlying spot price
• Time Value — the portion of an option’s premium that is attributable to the amount of time remaining until the expiration of the option contract
• Premium — the total amount that investors pay for an option, which includes the value of time remaining plus any positive difference between spot and strike price
• Break-Even Level — the market price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the option contract (usually the difference between the spot price and any time value)

The different types of options

Generally, there are two types of options contracts: call and put options. In regular options trading with exchange-based brokers, options trading strategies can be grouped into these:

• Covered Call
• Married Put
• Bull Call Spread
• Bear Put Spread
• Protective Collar
• Long Straddle
• Long Strangle
• Long Call Butterfly Spread

These are strategies that traders can implement themselves using different call and put options contracts.

Among forex and CFD brokers, however, options strategies are structured into simple contracts that the trader can execute with a single click of a button. Some of the common forex-brokers options types include:

• Binary options
• Swaptions
• Barrier option (turbo warrants, touch brackets, range, knock-outs, as they are called by various brokers)
• Call spreads
• Average rate options

How do forex options work?

It depends on the nature of the forex options contract — binary option, call spreads, or barrier options. For a binary option contract, all you need to do is to predict whether the price of the underlying asset would be above or below a specified strike price at expiration. If you think it would be above the strike price, you buy, and if you think it would be below the strike price, you sell.

With a barrier option, such as the Range option, you predict that the price of an asset will trade within a certain range at a given time. If it trades outside that range, you lose your bet, but if it stays within the range, you win.

What is a call option?

A call option is a type of options contract that gives the option holder (buyer) the right, but not the obligation, to buy an underlying asset at a specified price (strike price) within a specific time period. The underlying asset can be a stock, bond, commodity, or other asset or instrument (including Forex CFDs). To buy a call option, you pay a fee called the premium, which is charged per unit of the asset. This premium is the maximum you can lose on a call option, and you lose the money when the contract expires without exercising it.

What is a put option?

A put option is a type of options contract that gives the option buyer the right, but not the obligation, to sell (or sell short) a specified amount of an underlying asset at a predetermined price (strike price) within a specific time period. Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes.

To buy a put option, you pay a fee called the premium, which is charged per unit of the asset. This premium is the maximum you can lose on the option, and you lose the money when the contract expires without exercising it.

Can I trade options as a retail trader?

Yes, you can trade options as a retail trader. There are different brokers that offer options trading to you as a retail investor. Some of them are exchange-based brokers that offer traditional options trading in stocks, ETFs, indexes, and commodities. Firstrade is a very good broker for trading stock options — it is based in the US and regulated by the FINRA.

Others, such as AvaTrade, are forex and CFD brokers that offer over-the-counter (OTC) CFD options. NordFX and IQ Options offer OTC options in the form of binary options in currency pairs, stocks, and commodities. eToro just acquired Gatsby, a popular options trading app to start offering options in various instruments, including stocks, indexes, and cryptocurrencies. HF Markets uses its OptionTrade platform for options trading.

Comparing options trading brokers

Which broker offers the best options trading conditions?

AvaTrade offers great options trading conditions. It offers OTC options in many financial instruments, including over 40 currency pairs, and there are no commission charges, as the trading cost is already included in the spread. You pay zero spread on expiry — there is no closing spread when you hold an option until its fixed expiry date.

Which broker has the best options trading platform?

HF Markets (HFM) is the options broker with the best trading platforms. Its OptionTrade platform is designed for quick bets and comes with a great user interface. However, the broker does not offer options trading to traders from certain countries, such as the US and Canada. The availability of the platform and services depend on your locality.

Which broker has the best options trading app?

eToro’s Gatsby wins the best mobile trading app. It has a user-friendly interface and grants you easy access to trade the available instruments. There are no commission charges, and you can even earn Gatsby Rewards points for each eligible trade you do.

However, AvaTrade’s AvaOptions mobile trading app is also very exceptional, and we think that both apps share this award category. The app includes a wide selection of professional risk management tools, portfolio simulations, and much more. These give you total control over your portfolio, letting you balance risk and reward, to match your overall market view.

What are the risks of trading options?

Like other financial instruments, options trading come with some risks. It is possible to lose the entire principal invested. But not all options carry the same risk. If you are the writer (seller) you have a different risk than if you are the holder (buyer).

As an options holder, you risk the entire amount of the premium you pay, but as a writer (seller), your risk is different and is even higher. If you sell a call, you are selling the right to purchase to someone else. So, your upside potential is the premium for the option, but the downside potential is unlimited, as an asset price can theoretically continue rising forever. On the other hand, if you sell a put, you are selling the right to sell to someone else. The upside potential is the premium for the option, the downside potential is the amount the asset is worth.

Are options in forex settled with physical delivery?

Forex options trade over-the-counter (OTC), and they are structured to be traded without taking actual delivery of the asset. Traders can choose prices and expiration dates that suit their hedging or profit strategy needs. However, this does not mean that the risks associated with options trading are not there. Forex options come with different risks, including conflicts of interest, given their OTC nature.