Where can I purchase options?

By Jean Folger AAA
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. If a long call is owned on the record date of a stock, is the owner of the option ...

    Learn how holding a long call option does not entitle the holder to a dividend on the underlying stock unless the call is ...
  2. How can an investor profit from the cyclical nature of the electronics sector?

    Learn how sector rotation and clever options strategies, such as the long straddle, help investors profit from the cyclical ...
  3. What does negative vega mean for credit spreads?

    Learn about the option Greek vega, credit spreads and how vega affects the values of option credit spreads when volatility ...
  4. What options strategies are best suited for investing in the banking sector?

    Learn how shrewd investors employ the covered call options strategy to capitalize on the banking sector's reputation for ...
RELATED TERMS
  1. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  2. Catastrophe Equity Put (CatEPut)

    Catastrophe equity puts are used to ensure that insurance companies ...
  3. Open Trade Equity (OTE)

    Open trade equity (OTE) is the equity in an open futures contract.
  4. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  5. Short Put

    A type of strategy regarding a put option, which is a contract ...
  6. Wingspread

    To maximize potential returns for certain levels of risk (while ...

You May Also Like

Related Articles
  1. Options & Futures

    Why Is Best Buy Stock So Volatile?

  2. Trading Strategies

    A Guide Of Option Trading Strategies ...

  3. Options & Futures

    Options and Roth IRAs: Do's and Don'ts

  4. Options & Futures

    Trade Covered Calls On High Dividend ...

  5. Mutual Funds & ETFs

    How do I invest or trade market indicators?

Trading Center