Options trading has a perception that it’s only reserved for expert traders, but in reality, can be an effective tool for many investors of all experience levels.
Lesson Introduction to options trading
What is options trading?
A beginner’s guide to buying and selling options to help you understand what options are, how they work, and why they can be useful.

Let’s dive into the world of options so we can understand how these complex investments work, and how to trade them using the Questrade Edge platforms.
What are options?
Options are known as "derivative investments." A derivative is something that gets (derives) its value from another asset, like a stock or ETF (something called the underlying.)
Options are contracts with 3 components:
- The option or obligation to buy or sell an investment in the future
- The specific price called the strike price, at which the investment will be bought or sold
- An expiration date after which the contract becomes worthless
An option contract is created when it’s written by a seller in the market in return for a premium (money). Option writers can be individual traders, or sometimes ‘market makers’ or institutions.
- Writers are said to be taking the “short position” in an options trade, and will take on certain obligations that we’ll cover in detail below.
Option buyers (who pay the premium) receive the right, but not the obligation to buy or sell 100 shares of the underlying investment at a set price called the strike price, on or before the expiration date of the contract from the writer/seller.
- Buying an option is also commonly referred to as a “long position”.
Options contracts are also based on 100 shares of the underlying investment, and when viewing a quote for an options contract, you must multiply the price by 100 to obtain the true market value.
Let’s break it down.
There are actually two types of option contracts, Calls and Puts, each with their own rights and obligations.
Calls
A call option gives the buyer the right (but not the obligation) to buy 100 shares of the underlying (usually a stock or ETF) at the strike price, on or before the expiration date.
The buyer pays a premium to the seller for the contract.
The writer of a call option takes on the obligation to sell 100 shares of the underlying at the strike price, if called upon to do so by the buyer of the option. The writer receives a premium from the buyer for the contract.
Puts
A put option gives the buyer the right (but not the obligation) to sell 100 shares of the underlying (usually a stock or ETF) at the strike price, on or before the expiration date.
The buyer pays a premium to the seller for the contract.
The writer of a put option takes on the obligation to buy 100 shares of the underlying at the strike price, if called upon to do so by the buyer of the option. The writer receives a premium from the buyer for the contract.
Calls and Puts are exact opposites when it comes to the rights and obligations of the writer versus the buyer.
There are four basic option positions, depending on if you’re the buyer or seller, and whether it’s a Call or a Put, here’s a handy chart showing all the types of options trades.
Call option | Put option | |
---|---|---|
Buying options (long position) | Pays a premium (money) to the writer. Has the right to buy the underlying security at the strike price on or before the expiration date.
Call buyers usually expect the price of a security to rise in value. |
Pays a premium (money) to the writer. Has the right to sell the underlying security at the strike price on or before the expiration date.
Put buyers usually expect the price of a security to decline in value. |
Selling or Writing options (short position) | Receives a premium (money) from the buyer of the contract. The writer has the obligation to sell the underlying security at the strike price if called upon to do so (by the
buyer of the option).
Call writers generally expect the price of the underlying security to stay the same or fall in value. |
Receives a premium (money) from the buyer of the contract. The writer has the obligation to buy the underlying security at the strike price if called upon to do so (by the
buyer of the option).
Put writers generally expect the price of the underlying security to stay the same or rise in value. |
Exercising and Assignment
Exercising and Assignment are two important terms to familiarize yourself with before jumping into the world of trading options.
- Exercising:
Option buyers can exercise (use) their rights to either buy or sell shares of the underlying asset. When the buyer exercises this right, the writer of the option is said to be assigned. - Assignment:
The writer who has been assigned has the obligation to either buy or sell shares of the underlying asset to/from the buyer of the option contract.
In real-world scenarios, most options contracts are never exercised, and will expire worthless, or are bought or sold before the end of the trading day on expiration day.
Many traders will often buy or sell their option contracts prior to expiration for a profit, to limit a loss, or to prevent them from being assigned.
American vs European options
The vast majority of Equity (Stock or ETF) options, are considered to be American style options.
These types of options can be exercised (when the buyer assigns the writer to buy/sell) at any time on, or before the expiration date of the option contract. Exercising involves the exchange of shares of the underlying asset.
Most Index options (when the underlying is an Index like the SP500, or TSX60), are considered to be European style options.
These types of options can only be exercised or assigned on the expiration date, not before. Exercising does not involve any shares, but rather the cash difference is settled (since you can’t buy/sell shares of an index directly).
You can check the “Style” of any option contract in the Level 1 quote window in the Questrade Edge platforms.
Why do people trade options?
While there’s no single answer to why a trader starts trading options, 3 key advantages stand out:
- Higher leverage
- Since option contracts are based on 100 shares of the underlying investment, there’s an aspect of leverage “built in” compared to buying or selling regular shares.
- For example: Buying 200 shares of a stock is usually more expensive than simply buying 2 Call contracts. If the price of the stock increases significantly, the percentage gain with the call contracts would be higher than the gain on the shares alone. This can reduce the amount of capital, or money that needs to be used for the trade.
- Help limit risk (hedging)
- Options can be used as a form of “insurance” or hedging for regular stock positions. In a long position where you own shares, you could buy a Put contract to establish a price “floor”. If the price of your shares ever drops below the strike price of your put, you’re still able to sell your shares at the strike price.
- Alternatively, in a short position, you could buy a Call contract to establish a price “ceiling”, if the price of your shares goes above your strike price, you’re still able to cover your short position at the strike price.
- Alternative strategies
- Options are an extremely flexible tool, and there are many strategies used to recreate or mimic other types of investments or asset classes, these are sometimes called synthetics.
- Traders can participate in much more than just price increases or decreases. The passage of time and movements in volatility can also affect the value of an option contract.
- Options can also allow for more flexibility in registered accounts. In RRSPs, and TFSAs, and FHSAs for example, shorting is not allowed due to CRA rules. A trader who wants to take advantage of a price decrease could buy a Put contract as an alternative to a short position for example.
Where do option contracts get their value?
Options get their value from two sources:
- How much time is left until expiration (Extrinsic, or Time-value)
- Is the option profitable to exercise? (Intrinsic value)
Time value
The longer an option contract has until it’s expiration, the more time value it will have “built in” to the market price of the contract.
This is because with a longer expiration time, the odds that the contract will end up profitable will increase. This is especially the case when the underlying asset has high implied volatility (big swings in price).
As the contract gets closer to expiration, this time value will decrease as the odds of the contract becoming profitable (or more profitable) decrease. This daily decrease in time value is often called Theta or time-decay.
Intrinsic value
Intrinsic value is measured as the difference between an option’s Strike price and the current price per share of the underlying asset.
With a Call option:
- If the price per share is above the strike price, the option will have intrinsic value equal to the difference in prices.
- If the price per share is below the strike price, the option is considered to be ‘out of the money’ and has no intrinsic value.
With a Put option:
- If the price per share is below the strike price, the option will have intrinsic value equal to the difference in prices.
- If the price per share is above the strike price, the option is considered to be ‘out of the money’ and has no intrinsic value.
Tip: Remember, Calls and Puts are opposites when it comes to calculating intrinsic value.
In the money (ITM) and Out of the money (OTM)
Options that can immediately be exercised for a profit are considered to be ‘in the money’, and will always have some intrinsic value.
Let's look at 2 quick examples:
- A ‘XYZ’ call has a strike price of $100, and the stock is currently trading for $120. The option buyer can exercise the call to purchase 100 shares for $100, and immediately sell them for a $20 profit in the open market. This call option is ‘in-the-money’ and has a $20 intrinsic value.
- An ‘ABC’ put has a strike price of $80, and the stock is currently trading for $95. The option buyer would not exercise their put to sell shares at $80 while they are able to sell them in the open market for $95. This put option is ‘out of the money’ and has no intrinsic value.
In the money (ITM)
An option is considered to be in the money or “ITM” if it can be exercised profitably (ignoring the premium paid). ITM options will always have some amount of intrinsic value, the amount is determined by the difference in share price vs strike price.
Out of the money (OTM)
Out of the money or “OTM” options have no intrinsic value since it would not be profitable for the buyer to exercise the option. The value of an OTM option is solely determined by the Time Value (time to expiration).
Check out the table below for a handy breakdown:
Call option | Put option | |
---|---|---|
ITM | Strike price is below the price per share of the underlying asset.
Option can be exercised profitably. Example: DIS is trading for $50, and the strike price is $40. The Call can be exercised for an immediate $10 profit. | Strike price is above the price per share of the underlying asset.
Option can be exercised profitably. Example: AAPL is trading for $150, and the strike price is $180. The Put can be exercised for an immediate $30 profit. |
OTM | Strike price is above the price per share of the underlying asset.
Option has no intrinsic value. Example: AMZN is trading for $3000, and the strike price is $3200. The Call is not profitable to exercise, but may contain some time value depending on the expiry date. | Strike price is below the price per share of the underlying asset.
Option has no intrinsic value. Example: TSLA is trading for $850, and the strike price is $800. The Put is not profitable to exercise, but may contain some time value depending on the expiry date. |
Tip: At the money or “ATM” refers to an option when the strike price is the exact same as the stock price.
Reading an option quote
When you first view a quote for an option contract, it might seem intimidating compared to a regular stock or ETF.
Check out the section below for an overview, and rest assured, you’ll be reading and understanding options quotes in no time.
We'll look at Questrade Edge Web below, but options quotes might look a little different depending on the Questrade Edge platform of your choice. To learn about trading options on Edge Desktop, see How to trade options in Questrade Edge Desktop.
Reading quotes in Questrade Edge Web
Looking up an option quote (sometimes called an option “chain”) using the Edge web platform is easy. First, access the Questrade Edge Web platform on the right side panel of your Summary page.
Once you’re in the Questrade Edge Web platform, click the Options button on the left navigation menu, and enter the ticker symbol of the underlying asset. You can also toggle between Stock (STK) and Option (OPT) in the main symbol lookup window.
- At the top of the page, you’ll see a simplified level 1 quote with important information about the underlying asset like the Bid, Ask, Volume and change in price.
- The menu on the left allows you to switch between viewing single-leg options (buying or selling a call or put), or complex multi-leg options strategies which involve combining different types of options or stock ownership.
- Check out this article on Option levels for more information about the different types of strategies available.

- The menu here allows you to switch between viewing different expiration dates.
- You can choose to view only options expiring soon (near), in a long time (far), All expirations, or a select date.
- The Edit columns button on the top right allows you to change the default columns of information displayed here in the options quote table.
- By default, you’ll see the Bid, Ask, Last traded price, Change in $, Volume, Open interest, and Implied volatility.
- The additional columns available are: Ask size, Bid size, Change in %, and the various Options “Greeks”:
- The “Greeks” (Delta, Gamma, Rho, Theta, and Vega) are explained in more detail in the section down below.
- You can also choose to change how many Strike prices are shown in the quote table below.
- You can view any amount from 4-9, or choose to view All strike prices
- Please note: If you choose All strike prices, and All expiration dates, depending on the speed and performance of your computer, you may experience slowdowns due to the amount of information streaming and processing in the background.
You can also click on the Calls or Puts buttons at the top of the table to show only that type of option.
Let’s take a deeper look at the options quote table:
With the default view, Calls are shown on the left, and Puts are shown on the right side.
Options highlighted in green are considered to be In-the-money, in this example, SPY’s price per share is $452.73.

- On the top left, we’ll see the expiration date for the 4 strike prices shown.
- On the top right, we’ll see the amount of days left until expiry.
- Click on any of the Bid or Ask prices to quickly add this specific option to your order entry screen on the right side.
- Clicking the Bid or Ask will set up a limit order with that specific price.
- Click on any of the rows in the table to view a detailed quote for that specific option.
- In this example above, clicking would bring up a quote for the $453 Put expiring Sept 1 ‘21.
You can also expand, or hide specific expiration dates from the table by clicking on the blue arrow on the left beside the expiration date.
Can’t see the strike price you’re looking for? Try changing the view using the button at the top. If the strike price still isn’t available, it’s possible there are no options contracts available at that price, and the open interest might be zero.
Options quotes on the web
It’s also important to understand the basics of how an option is quoted in popular media, or other online investing tools. All options quotes will usually contain at least the Strike price, underlying asset, the type (call or put), and the expiration date.
Not every website, or platform will quote these in the same order, but generally you’ll see the following:
Underlying asset | Expiry Date | Strike price | Option type |
---|---|---|---|
XYZ | November 10, 2021 | $120 | Call |
Sometimes this is shortened to: “XYZ10Nov’21$120C” but may appear in another order like: “XYZ$120PNov10’21” depending on the source.
Check out the related articles for an overview of option quotes in Edge Desktop, important options terminology, practical examples of trading options, and more.
Ready to get started?
Log in to start exploring options, or open an account today.
Note: Securities shown are for illustrative, educational, and visual purposes only, and should not be relied upon as financial advice. The information provided is not intended to be and should not be construed as a recommendation, offer, or solicitation to buy or sell.
Transactions in options can carry a high degree of risk, and may not be suitable for investors with a limited risk profile. Purchasers and sellers of options should familiarize themselves with the type of option (i.e. put or call) they contemplate trading and the associated risks.
Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.
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