A:

In the United States, all options contracts go through one of several options exchanges. An investor must have an account with a brokerage firm that provides options trading as part of its product offerings. As a brokerage customer, your options orders will be routed through the brokerage firm to one of the options exchanges. Depending on the broker, you may be able to "route" your order to send it to a particular exchange, or the brokerage firm will use a standardized method for selecting the exchange to carry out the order.

Before you can trade options, your broker will approve you for a specific level of options trading. You will have to fill out an options agreement form that is used to evaluate your understanding of options and trading strategies and your general investing experience. Generally, brokerages have four or five levels of approval that are based on factors such as your investing objectives, investing history and your account balance.

Your options trading level, such as "conservative" or "aggressive," will determine the types of options strategies you will be able to trade. Since some strategies involve substantial risk, you may or may not be allowed to employ these riskier strategies, depending on your trading level. Typically, traders with more experience and more liquid assets are given higher approval levels; conversely, those with less experience and smaller accounts are given more conservative approval levels.

Once you have an account and have been approved for options trading, you can use the broker's trading platform to scan for positions that match your market outlook or strategy and to submit orders. Alternatively, you can phone in orders by calling the broker's trade desk.

There are other ways to trade options but they are not as common as routing orders through a broker. Over-the-counter (OTC) options are not traded via an exchange; instead, these contracts are executed between two independent parties. Since OTC options are not traded on exchanges, counter-party risk is not limited by the Options Clearing Corporation (OCC) as it is with exchange-traded options. Typically, only institutional traders or investors with large amounts of capital trade OTC options because of this increased financial risk. Well-capitalized professionals can also become members of one of the exchanges to place trades directly.

RELATED FAQS
  1. How can I find out which stocks also trade as options?

    The trading of options has become increasingly popular among retail investors as they become aware of the many different ... Read Answer >>
  2. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  3. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
  4. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
  5. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Answer >>
  6. Why do option volume quotes differ on different websites?

    Option quotes are different in price and in volume because identical options can trade on more than one market or exchange. ... Read Answer >>
Related Articles
  1. Options & Futures

    Top U.S-Regulated Option Brokers

    Options trading requires amassing significant capital and then facing high volatility. To protect yourself, ensure you trade only with regulated brokers. Here is a list of top U.S.-regulated ...
  2. Options & Futures

    Trading Options on Futures Contracts

    Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ...
  3. Options & Futures

    Introduction - Day Trading and Options

    Options have not been a tradition part of day-trading strategy, but this is quickly changing.
  4. Options & Futures

    20 Investments: Options (Stocks)

    What Is It? Options are a privilege sold by one party to another that offers the buyer the right to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time ...
  5. Options & Futures

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  6. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  7. Options & Futures

    Exploring European Options

    The ability to exercise only on the expiration date is what sets these options apart.
  8. Options & Futures

    A Newbie's Guide To Reading An Options Chain

    Learning to understand the language of options chains will help you become a more informed trader.
  9. Options & Futures

    SEC-Regulated Options Brokers

    Investopedia provides a List Of SEC-Regulated Options Brokers
  10. Stock Analysis

    How To Read An Options Table

    With more information available and the ability to quickly trade options online, investors are becoming savvier with using options to speculate, hedge and create their own financial strategies ...
RELATED TERMS
  1. Exchange-Traded Option

    An option traded on a regulated exchange where the terms of each ...
  2. Forex Option & Currency Trading Options

    A security that allows currency traders to realize gains without ...
  3. Exotic Option

    An option that differs from common American or European options ...
  4. Optionable Stock

    A stock that has options trading on a market exchange. Not all ...
  5. Option Class

    The set of all the call options or all the put options for a ...
  6. European Option

    An option that can only be exercised at the end of its life, ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center