Options are derivative contracts that give the buyer the right, rather than the obligation, to buy or sell an underlying asset at a specified price (strike price) by a certain date (expiration date). There are two types of options: call options and put options. A call option gives the holder a buying right, while a put option gives the holder a selling right. Investors often use options contracts to hedge risks, while traders trade the contracts for speculation.
As with most other financial products, options can be bought and sold on brokerage trading platforms. So, in this guide, we’ll discuss options trading platforms and offer our top picks for the best options trading platforms.
Our Picks for the Best Options Trading Platforms
There are quite a number of trading platforms that can be used to trade options, and the one you choose depends on your unique investing needs. These trading platforms range from very simple ones to complex platforms with historical charts, quarterly reports, technical analysis, and pricing tools. We have compiled a list of the best platforms based on specific criteria such as fees, speed of execution, data security, customer service, and user-friendly interface.
What is a Trading Platform?
A trading platform is an online trading system that makes it possible for traders to place and monitor their trades remotely, from anywhere in the world. It is computer software that links the trader to the market through a broker. Most brokers have their own trading platforms, but there are independent ones that would require you to link your broker.
Brokers often offer their platforms for free or at a discount rate in exchange for maintaining a funded trading account and making a specified number of trades per month. Most trading platforms come bundled with other features, such as charting tools, news feeds, real-time price quotes, and even premium research. However, the best trading platforms offer a mix of robust features and low or no subscription fees.
Some trading platforms are specifically made for trading specific markets, such as stocks, currencies, futures, or options markets. So, some multi-asset brokers offer unique options trading platforms.
3 Ways You Can Benefit From an Options Trading Platform
Here are three ways you can benefit from an options trading platform:
- It may lower transaction costs: The cost of buying an option (the premium plus the trading commission) may be a lot less than what you would have to pay to purchase shares outright.
- It can limit the downside risk for option buyers: When you trade stocks through an options platform, you limit your downside risk and exposure to the market to just the premium you paid. This is because you are not obligated to follow through on the trade. If your assumptions about the timeframe and the stock’s price trajectory are incorrect, you can choose not to execute your right to buy the stock, so you only lose the premium you paid to buy the options contract.
- Offers traders more flexibility: Trading options offers you more flexibility in trading. Before an options contract expires, you have multiple trading strategies which you can deploy, such as selling an “in-the-money” options contract to other traders or exercising the option (buying the shares and adding to your portfolio).
How Do Options Trading Platforms Work?
A common misconception among investors is that a trading platform connects them directly to the securities markets. This, however, is not the case. When an investor places a trade, (e.g., buys a call option) the order goes to the broker who decides the best way to execute it depending on the size, availability of the stock, or incentives such as payment for order flow. The order may be sent to the floor of an exchange or a third-party market maker, or it may be executed internally (i.e., shares are allocated to the buyer from the brokerage’s inventory). This is then routed through a clearinghouse which clears the trade after two business days.
3 Steps to Start Trading with an Options Trading Platform
Educate Yourself About Options
Options trading is quite complex and risky. You will need to learn about the various options and their trading strategies. The fastest way to learn options trading is by enrolling in online courses, but you may also learn by reading books written by experienced options traders to grasp the concept.
Develop a Plan
Knowing is not enough in options trading. You need to create a trading plan that specifies your entry and exit strategy and whether you are going to execute your contract or sell off to another trader once you are in the money. Set a price target for losses, and begin to cover when you can. This is important because the market can go against your trade in an instant.
Create an Options Trading Account and Start Trading
Once you have prepared yourself by reading and developing a plan, you can create an account, fund it, and start trading. Always ensure that you have enough funds to support your options trading strategies. More importantly, trade with only an amount you can afford to lose.
What Are the Advantages of Using an Options Trading Platform?
The advantages of using an options trading platform include:
- Ability to monitor investments in real-time from remote locations
- Low transaction costs
- Ability to execute your options at your convenience
- The flexibility to reduce potential losses by selling the options contract to another trader
- Enormous liquidity
- Fast trade executions
What Are the Disadvantages of Using an Options Trading Platform?
Here are some of the disadvantages of using an options trading platform:
- It can lead to careless investing
- There is no professional guidance from a broker
- Slow internet connection could mean losses if trades can’t be executed fast enough
- Potential traders must meet specific requirements and be approved by your broker
- Traders may incur additional expenses that affect their profit and loss results
Expert Tip on Selecting an Options Trading Platform“ When selecting an options trading platform, look for a blend of user experience, access to research, trading tools, and seamless trade management features. It is also important to consider the subscription fees. ”- Emmanuel Ekwomadu
How to Choose the Best Options Trading Platform?
There are certain factors to consider if you want to choose the best options trading platform, so ask yourself the following questions:
Is the Trading Platform Regulated?
Find out whether the platform is regulated by a known financial authority, such as the Financial Conduct Authority (FCA) in the UK or the Financial Industry Regulatory Authority (FINRA), or the Securities and Exchange Commission (SEC) in the US.
What Fees Apply?
Always find out what fees and commissions you would incur as a user. You may be posting a high volume of trades, so paying attention to fees and commissions is a crucial part of your selection strategy. Go for a broker that charges the lowest fees and commissions.
What Payment Methods Are Accepted?
It is advisable to go for a platform that has a plethora of payment options. This gives you flexibility in funding and withdrawing from your account.
What Are the Available Assets to Trade?
As much as you can, try to find out what assets are available for trading on the platform and if there are special conditions for trading certain assets. Some options trading platforms do not allow day trading, while others omit certain ETFs and penny stocks from their lists. This could reduce your trading options and limit your chances to make money.
Is There a Demo Account?
The platform should have a demo account option for practice purposes so that you can familiarize yourself with features on the platform before transitioning to live trading.
What is the Account Minimum?
The required minimum balance varies from platform to platform. So, verify the minimum balance required before choosing an options trading platform. This is especially useful if you want to trade options that require a minimum margin requirement.
What Educational Resources Are Available?
Some options trading platforms provide educational resources to help traders improve their knowledge of the market. Educational resources could be a feature that distinguishes one trading platform from another. Check for this before choosing a platform.
Does the Platform Offer Customer Support?
Issues are bound to crop up when trading options: an order may not be executed on time, or there are delays in depositing funds. So, you need an options trading platform backed by a reliable customer support team that can resolve issues quickly.
Is There a Mobile Platform or App?
A good options trading platform should have a mobile app in addition to web and desktop platforms. This gives you more options to trade options from anywhere at any time.
Frequently Asked Questions
It depends on your trading objectives and the size of your trading capital. Options trading platforms allow you to day trade stocks with a small trading capital, while you would need more than $25,000 to meet the margins trading rule and be able to day trade stocks directly.
RobinHood is known for its commission-free trading policy. However, other platforms are now offering commission-free trading for stocks.
Most options trading platforms are good for beginners. It all depends on what the trader wants, but E*TRADE and RobinHood are quite easy to use.
Most trading platforms come bundled with some trading tools, such as charting tools, news feeds, and real-time price quotes. Some platforms also offer premium research tools, such as Option Probability Analysis, Option Positions, and Options Chain.
It does not take much time to open a trading account. Once you have all the necessary identification documents, you can open a trading account in a few minutes.
Options platforms make money from payments of order flow from market makers, interest on deposits, and commissions on rebates. Some platforms charge subscription fees for access to exclusive investment options.