How To Do Options Trading on eToro?

Options trading is becoming more popular, but it’s mainly for experienced traders. Not all brokers offer it, and the trading terms can vary a lot. eToro offers options trading, letting investors guess where the stock market or individual stocks or bonds are heading. Options contracts let you choose to buy or sell an asset at a set price by a certain date. Now, let’s see how to do options trading on eToro.

What is Options Trading?

Options trading means you’re making deals about stocks, ETFs, commodities, currencies, or benchmarks at a certain price for a specific time. These deals have an end date, usually the last Thursday of the month. Once this date arrives, the deal ends, and it’s worth nothing anymore. Unlike futures, options don’t make you or the other party do anything.

Options can get really complex, with different markets, contracts, and details. But online brokers like eToro, especially for newer traders, usually keep things simple.

But why bother with options instead of just buying and selling at the current price? Some people think they can guess what the market will do, so they use options to make money on those guesses. Options can also protect your investments from risks. Whatever your reason, it’s all about what you think the market will do in the future compared to now. Remember, though, there’s no sure way to always win in the market.

In the stock market, when you trade options, you don’t actually own the shares until you choose to buy them. This is different from regular stock trading. When you buy a stock, you own a part of the company. But with options, you’re just saying you want to own the company’s shares on a certain date without actually owning them.

How do options work?

It’s simple: it all depends on what you think the market will do. This determines what type of option you buy and how you can make money.

Firstly, there are calls. When you buy a call, you believe the stock price will rise. A call gives you the right to buy shares at a specific price. Let’s say you buy a call for $100, allowing you to buy shares at $10 each. If the price goes up to $15, you’d earn about $5 per share. That’s $500 for 100 shares, minus the original cost of the option. You’d have a $400 profit.

Another way to trade options is through spreads. A spread involves investing in two or more options at the same time. There are various types of spreads, like verticals, butterflies, condors, straddles, strangles, rolls, and more. Usually, you buy two options, which can help manage risk or change the likelihood of profit with different price movements.

In all these cases, your losses are usually limited to the premium you paid. However, in the wider world of options trading, that’s not always the case.

How to do Options Trading in eToro

This step-by-step process will show you how to do it using the eToro Options platform.

1. Log in to your account

To start, make sure you’ve registered and verified your eToro Options account. If you already have eToro or Gatsby credentials, they should work. If you’re new to trading options, you may need to answer a few questions to ensure you’re suited for options trading.

2. Fund your account

Once your account is registered and verified, the next step is to add funds. Click the “Fund my account” button, then link your bank account and start a transfer.

Remember, the money in your eToro account is separate from your eToro Options account, so you need to add funds to each one separately.

3. Choose your option

Now, you need to choose which option to trade. Search for companies you like and select one. Then, click “Trade.”

You can choose between a put, a call, or a spread.

Once you’ve chosen the type of option, it’s time for specifics. Select the date you expect the option to move by (the expiry date) and the price at which you expect it to move (the strike price). You’ll see the prices of the available options on the page where you select your strike price, under the “Price per contract (ask)” section. You’ll also see the option’s trade risk, bid price (current value if sold), daily price change, and breakeven point.

Finally, choose how many 100-share contracts you want to buy.

4. Buy your option

When you’re ready to buy your option, just check all the important numbers and swipe up on your screen. If you’re not ready to make the purchase yet, you can save your contract as a draft trade.

Once you buy your option, you need to decide what to do next. You can wait until the expiry date to see what happens. If the stock moves like you expect, you might make money. eToro Options will close your option at 3:30 on its expiry date*, and you’ll see any profit in your account then.

If the stock doesn’t move like you thought, or doesn’t move enough, your option will either be closed at a partial loss or expire without value.

5. Trade your option

If you decide you don’t want to wait for your option to expire and cash out, you can sell it to someone else in the market.

To sell your option, go to your existing ticket and choose what type of order you want: market, limit, or trigger. To learn more about these options, click the link on the screen.

If you choose a limit order, just set your asking price (we’ll show you options based on current bid prices for similar options), set a time limit, and wait to see if someone agrees to your offer.

6. Other ways to trade

Want to try something besides options trading? If you’re not ready for options yet, you can use the draft trading function on eToro Options. It lets you see how options trading works without investing real money. You can also check out what other users are trading on the eToro Options news feed and read their comments for ideas.

What are uncovered options?

Uncovered options are options you can trade where you don’t own the underlying shares or options contracts to cover the short margin risk. This means if the stock moves unfavorably, you might need to pay a lot more money than what’s in your account, leading to a “margin call”.

Trading this way can be risky because you could lose more than what you have. However, the potential rewards are high too.

Experienced traders might like the risk-reward balance of uncovered options. But for new traders, it’s better to start with less risky options. On eToro Options, we don’t offer uncovered options, so new traders don’t have to worry about this high level of risk. However, all options involve some risk.

Why Choose eToro for Options Trading?

eToro is a digital trading platform that’s user-friendly and simple, designed for people who want to manage their money and trade in the global market. It’s easy to use, and it doesn’t use complicated financial terms like other big trading platforms. Here’s why you might want to pick eToro:

1. Easy to Use: eToro has a simple design, making it easy for anyone to trade stocks, buy cryptocurrencies, and trade options.
2. Learn and Practice: You can find guides, videos, and tutorials on eToro to help you understand how to manage your money better. Plus, you can practice trading with a free $100,000 mock account to improve your trading skills.
3. No Commissions on Options: Unlike some platforms, eToro doesn’t charge any commissions on options contracts. However, there are regulatory fees for some options, and clearing firms might charge processing fees. You can find details about these fees on eToro’s fee schedule.
4. Earn Interest on Uninvested Cash: If you have cash sitting in your options account, it can earn you interest, up to 4.9% annually.
5. Social Trading: eToro offers a feature called social trading, where you can follow other users, see what they’re trading, and even copy their trades. This helps you learn from others and improve your investment strategies.

So, if you’re looking for an easy-to-use platform to trade options and learn about investing, eToro could be a good choice for you.

Conclusion

If you like to take risks with your investments or you prefer to manage your portfolio more actively, you should think about adding options to your investing plan. Options give you another way to interact with the market and take a more hands-on approach to managing your investments. They can be really useful if you use them in a way that fits your strategy. To start trading options, you can download the eToro Options app. However, remember that in some rare cases, eToro can’t sell expiring positions. If this happens, you are responsible for any losses.