Options trading is a highly complex, and yet highly profitable, way of getting involved with the financial markets. By trading on options, you can take on positions with very little capital, and speculate on the changes in their prices. The profits that you can make while trading through options are unmatched by any other asset class, and in several cases, you can limit your maximum downside too.
Even among traders who wish to trade options, there are very few platforms that actually let you do so in a proper manner. These platforms can be difficult to find, especially if you have any particular trading requirements or preferences. Therefore, this guide reviews and discusses the top options trading platforms alongside some tried and tested options trading strategies that you could use.
In This Guide
Choosing the right platform that you can use to trade options is of the utmost importance, as it usually has a very direct and tangible effect on your profitability as a trader. While there are several platforms that will allow you to trade options, very few are as highly regarded as the ones discussed in this review. These platforms have been chosen because they possess a variety of desirable characteristics in addition to allowing options trading through them. A list of some of the top options trading platforms is:
4 Providers that match your filters
Fixed commissions per operation
No results found
Trying adjusting the filter to see some results.
Fees per operation
68% of retail investor accounts lose money when trading CFDs with this provider.
The risk of loss in online trading of stocks, options, futures, currencies, foreign equities, and fixed income can be substantial.
Your capital is at risk.
Schwab Stock Slices is not intended to be investment advice or a recommendation of any stock. Investing in stocks can be volatile and involves risk, including loss of principal. Consider your individual circumstances prior to investing.
A detailed review of the different options trading platforms listed above has been given below.
AvaTrade is the platform of choice for traders who are looking to trade forex options, and for good reason. The platform allows traders to trade on options of over 40 different currency pairs with a variety of different strike prices and expiration dates, creating a variety of options that is unmatched in the industry. Setting itself apart from other options trading platforms, AvaTrade allows you to trade on actual options contracts and not just CFDs, which means that you do not have to rely on just profiting from the options premiums. On the contrary, you could choose to exercise the options too, should you choose to do so. This is in contrast to the other assets that AvaTrade offers, which are usually all CFD products,
AvaTrade also has a dedicated options trading platform called AvaOptions, which allows you to evaluate the potential profitability of various strategies and calculate the potential profits, losses, and the point at which you will break even on the trade. Since options are an inherently more risky asset class than trading stocks or currencies, AvaOptions also has professional risk management tools that help you ensure that you are only trading within your own risk appetite, such as stop losses that are tied to the prices of the underlying assets.
Just like Plus500, AvaTrade and AvaOptions are both available as a web platform, desktop app, and mobile app. This allows people of different preferences and schedules to monitor their positions on the go. One minor drawback of the platform is that if you choose to speculate on options premiums instead of actually exercising the contracts, the spreads on the sales can be a bit high, which will end up cutting into your profits.
71% of retail CFD accounts lose money with this provider.
Robinhood is the platform of choice for retail investors and the platform which first popularised the idea of commissions-free trading. There are several reasons why this is the platform of choice that beginners tend to use. Firstly, the platform has been designed in a way that makes it very simple to navigate. The design teams at Robinhood have said that their target audience was the unsophisticated investor, and therefore, they wanted to create a platform that anyone could understand and use irrespective of their technical expertise. This stands in stark contrast to other options trading platforms, which might require a learning curve of their own before you can trade on them.
In addition to this, Robinhood also allows you to trade options on stocks, indices, commodities, and forex pairs. These are actual options contracts and not CFDs, which means you can exercise them as well as simply speculate on the prices of the option premiums. In addition to options, the platform also allows you to trade stocks, commodities, cryptocurrencies, indices, and ETFs. Their wide product offering, all of which is provided to customers at very low commissions, is the reason that the platform stands out.
Your capital is at risk.
The Interactive Brokers platform is one that has been specially designed for advanced and professional options traders, and the tools it offers are unmatched across the industry. For starters, through Interactive Brokers, you can trade actual options contracts on stocks from over the world, indices, currencies, and commodities. The fact that Interactive Brokers allows you access to the global markets instead of being centered just on the US markets is already a factor that enables them to stand out from their competition.
They have a professional Trader Workstation that houses a variety of professional trading tools such as algorithmic options trading, a Strategy Lab, a Volatility Lab, a Strategy Builder, a Portfolio Builder, and support for backtesting strategies. However, you cannot trade on leverage through the Interactive Brokers platform without a very high margin deposit, and this is one of the only drawbacks of the platform.
Interactive Brokers fees
As an options trading platform, Charles Schwab is very different from most of the platforms that have been discussed so far. This is because it is a platform that primarily caters to unique order types and fundamentally-oriented options traders. Their market research capabilities are unparalleled in the industry, which makes them a very valuable asset for traders who use this information to trade. In addition to this, they also allow traders to trade fractional options. This is a very useful characteristic. Usually, options are sold in groups of 100. Therefore, if you buy one options contract, the underlying asset is usually 100 shares. By allowing fractional options ownership, Charles Schwab allows you to trade on options even with low capital investments.
They also have a mobile app that you can use to trade, but it is not as good as the web platform, since it lacks the alerts features and does not support options chains either.
Charles Schwab fees
Plus500 is one of the best overall options trading platforms that you can use, and this is true for a variety of reasons. For starters, Plus500 is a very highly regulated broker, and it has been regulated by the CySEC as well as the FCA, both of which are considered to be Tier-1 regulatory agencies for trading platforms. In addition to this, their options trading includes a wide variety of asset classes, most of which is unparalleled across any of the other trading platforms that have been discussed in this article. For example, through Plus500, you can invest in options on stocks, indices, as well as commodities. As far as stock options are concerned, these are available with both US stocks and international stocks as the underlying asset.
Another characteristic that sets Plus500 apart from the other platforms is that it operates completely on a commission-free model. This means that for every trade you make, you only pay fees in the form of spreads. Since these spreads are usually lower than the commissions charged by platforms, Plus500 has one of the most competitive fee structures among any other options platforms. This is further compounded by the fact that the platform only allows you to trade CFDs. Since most standard exchange-traded options are cash-settled anyway, this is not much of a difference-maker. All this means is that at no point in the trade do you own the options themselves, on the contrary, you own a CFD on the option and can speculate on the direction that the options premiums will take.
For any given security that you wish to trade options on, you get to choose from a very wide variety of strike prices and expiration dates, which gives traders a lot of variety. In addition to this, the platform also has several charting tools that you can use to analyze the prices and premiums before you decide on the option you wish to buy or write. The only major drawback of Plus500 is that it does not have a specific platform that is dedicated to options trading, which means that several options-specific tools and analysis methods are unavailable. However, this is made up for by the fact that the platform has been designed in a very user-friendly way, and it is very easy to navigate the platform and learn where everything is. In addition to this, they also offer the possibility of a demo account that is funded with $100,000 in virtual money so you can practice your strategies before beginning to trade.
Lastly, some of the general advantages of Plus500 as a platform are that besides options, it allows you to trade on a whole host of other asset classes such as stocks, indices, ETFs, commodities, and forex pairs. You can also download the Plus500 mobile app to easily and conveniently be able to trade through your phone on the move.
72% of retail CFD accounts lose money.
A tabular comparison of the trading and non-trading fees that you will be paying while trading through some of the platforms discussed above has been provided.
In order to be able to fully understand options, there are several factors that you need to be aware of. Most of these peculiarities have been discussed below in detail.
Options trading refers to the buying and selling of calls or puts on a stock. In order to best understand this, let us consider an example. Suppose A has a piece of land that is currently worth $500,000. If A is looking to sell the land now, he can get $500,000 for it. However, there are rumors that a major builder might be trying to build a shopping complex near the land, which would drastically improve the value of the land. However, since these are only rumors, it is very difficult to know for sure whether or not this would happen.
In this scenario, B approaches A with a deal. B says that 6 months from now, he would like to have the option to buy the land from A for $500,000. In addition to this, because A will have to hold the land and not sell it to anyone else for the next 6 months, B wishes to give him an additional $50,000 for his trouble. A agrees, and takes the $50,000.
In case the price of the land goes up to $750,000, then B can buy it for $500,000. Including the $50,000 he gave A initially, he still makes a profit of $200,000 on an initial investment of only $50,000, which is a 400% gain.
In case the price of the land remains the same, B refuses to buy it. Since he only has the right to buy the land and not the obligation, he can refuse to buy it for $500,000. This is because, including the $50,000 premium, he would end up paying $550,000 for a $500,000 property.
If the price of the property goes down, B still refuses to buy it.
This is an options contract. Here, the underlying asset is the land, $500,000 is the strike price at which B has the right to buy the land, 6 months is the time to expiry, and $50,000 is the options premium. Both parties are happy entering into an options contract because in case the deal goes in favor of B, the profit potential is practically unlimited, whereas the maximum downside is capped at $50,000. A is happy to do the deal because there are ⅔ scenarios where he comes out on top. This is what options work like.
Options trading platforms are regulated in the same way as standard trading platforms. Usually, there is a separate platform that is solely dedicated to options trading, which is used by traders to perform complex analyses on options. This could include analyzing the profitability of options in a variety of situations to understand the profitability, or simply trying to ascertain the breakeven point of a particular trade.
The pros and cons of trading options have been discussed below in detail.
Options can be traded on any asset. Usually, the most popular options trading platforms tend to provide access to options on stocks, indices, commodities, and currencies. A few platforms even provide access to options on cryptocurrencies and ETFs, but those are rare. In addition to the standard exchange-traded options, you can also have more complex exotic options. For example, a compound option is an option on another option. You can also have options on futures contracts.
When you are trading options, it is best to use a trading platform that is dedicated to trading options. That is because options are derivatives and therefore are affected by a myriad of factors as opposed to standard securities. Therefore, specialist option trading platforms like Interactive Brokers usually boast of a variety of tools and features which include algorithmic options trading, a Strategy Lab, a Volatility Lab, a Strategy Builder, a Portfolio Builder, and support for backtesting strategies.
Since option prices are very sensitive to changes in any of the factors affecting them, it is important for options traders to have access to their trades at all times. If the tide begins turning against you, every second matters and it could enable you to cut your losses. Therefore, options traders usually prefer to use platforms that have mobile apps too, so that they can monitor their trades and open positions on the go.
There are several options trading strategies that people use in order to consistently make profits while trading them. While you might wish to use your own strategies or tweak them a little, it is important to be aware of these too. Some of the top strategies that are used have been discussed below.
This is one of the most basic options trading strategies. This is usually employed when you believe that the price of a particular security will stay where it is. In this case, you buy an ITM option, as in, a call option where the strike price is lower than the current price, and wait for it to expire so that you can profit. This only works if the prices stay where they are or move in a favourable direction. Since the option is already ITM, the premium that you pay might be a bit high, but the strategy will still be profitable if you turn out to be right.
If you believe that you can spot the momentum of stocks and predict exactly where a currently ongoing bullish or bearish run will end, then you should buy an option with the strike price very close to that top point in the momentum. Since you will be trading on the momentum, you might end up paying higher premiums than usual, because the odds are in your favour. An important thing to remember here is that when you decide to trade through momentum strategies, you have to monitor your positions at all times. This is because if the market turns against you, the value of your options will fall very quickly.
In order to get started with options trading, the process is quite simple and straightforward. The 4 steps that you need to follow in order to get started with Plus500 have been discussed below.
The first step is to head over to the Plus500 website and click on Sign Up. You will have to fill up a form and set your login credentials, following which you will be asked to submit proof of your identity. You can submit any government-issued identity as proof of ID, and a bank statement or utility bill as proof of address. The verification process takes a few hours, after which you are free to begin trading.
The next step is to deposit funds. On Plus500, you can do this through either a credit/debit card, in which case funds will show up immediately, or through a bank transfer, in which case the funds will take a few days to show up in your account.
Before you begin risking your own capital and trading options, it is best for you to get some experience and try out your strategies under live market conditions through a demo account so you know what works and what doesn’t. This is also a good tool to get familiar with the platform and its navigation.
Once you are confident, you just need to go to the platform, go to the asset whose options you wish to trade, and click on options. Then, you will be able to see a table listing all the different strike prices and expiration dates, from which you can choose based on your strategy.
Options trading is a very attractive and highly profitable way of trading that does not require a lot of capital. An option is a contract that gives you the right to be able to buy or sell an asset at a predetermined price at a set date in the future. It is quite popular because of its cost-efficient nature and the large upside. There are several platforms that you can use in order to trade options, but the overall best platform that you can use for this purpose is definitely Plus500.
Yes, trading options is inherently riskier than trading other assets because even a small movement can cause large changes.
Yes, options trading is legal in the US and is regulated by agencies such as the CBOE and the SEC.
Options trading platforms make money by either charging commissions on trades or spreads. Some platforms also do a combination of both spreads and commissions.
The best options trading platform for your needs will depend largely on your preferences, but the overall best platform is Plus500.
Yes, profits on options trading are taxable the same way as any other trading profits, and they are subject to capital gains taxes.
I'm a second year Accounting and Finance student at the University of Warwick, in addition to being an incoming Trading Analyst at Morgan Stanley. I'm passionate about the financial markets and all things finance.
Best UK Stock, Forex, CFD, Crypto, Social or Day Trading Platform that meets your needs.