How to Trade the TSX Index Option

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TSX index options provide a way to bet on the S&P TSX 60 Index, which tracks the stock prices of 60 large Canadian corporations. These options trade on the Montreal Exchange and you can buy or sell them via an online brokerage account. You can buy call or put options, which benefit from a rising or falling index, respectively. When buying options, the most you can lose is your initial investment. You can also write, or sell, these options to collect their current price, or premium. However, your potential loss can far exceed the premium you receive because you must pay the buyer when the option expires at an increased value, no matter how great the increase.

Things You'll Need

  • Access to an online brokerage account.
  • Establish an online brokerage account with permissions to trade index options. You must apply to your broker for these permissions. Although the requirements vary from one broker to the next, they usually require option-trading knowledge and experience, especially if you plan to write options. You can learn about options trading from the Nasdaq website and other financial sites, as well as by reading books about options investing. You can gain experience by running make-believe test trades on software platforms designed for this purpose, which are often provided by online option brokers.

  • Fund your account. To buy TSX index options, you need enough cash in your account to pay the premiums and any commissions or fees. If you want to write index options, you must deposit a substantial amount of collateral -- cash or securities -- to ensure you can pay for any losses. Your broker sets the amount of collateral you will need to post, but the amount normally greatly exceeds the option's market value.

  • Decide on the trade characteristics: put or call, buy or write, opening or closing a position, number of contracts, expiration month and strike price. TSX 60 index options expire on the third Friday of the expiration month. The strike price is a set value of the TSX 60 index that determines the current price of the option and its final value at expiration.

  • Place your order via the broker's trading screen. The ticker symbol for the TSX 60 index option is SXO. Enter the trade characteristics and confirm the trade as the broker's software directs.

Tips & Warnings

  • Your broker must make available to you detailed information about the risks associated with options trading. You might find it helpful to read and understand this information before placing your money at risk. Sophisticated options traders often hedge their risks through a variety of trading strategies -- for example, covered writing, spreads and straddles -- that your broker can explain to you.
  • If you sell unhedged options and the index moves sharply in a direction that creates losses for you, your broker may require you to add collateral to your account. If you fail to do so, the broker may close out your position and seize the existing collateral to cover your losses.
  • The TSX 60 option trades in Canadian dollars. If you are a U.S. trader, your broker will handle the currency exchanges for you. The potential for shifting exchange rates may affect your net profit or loss when trading foreign-denominated options.

References

  • Photo Credit marcduf/iStock/Getty Images
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