How to Trade the TSX Index Option
The TSX index option is a method of speculating on movement of the Toronto Stock Exchange, the major financial exchange of Canada. The TSX is the index of 60 leading stocks on the exchange, measured by market capitalization and liquidity. More generally, trading the TSX index option is a straightforward speculation on the direction of the Canadian economy.
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Instructions
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Trading the TSX Index Option
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Open an options trading account with a brokerage firm or online trading site. You must be qualified with a standard release form, which the brokerage will use to determine if you have the financial resources and experience to trade options.
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Fund your account with risk capital -- money that you are willing to use for speculation and which you can afford to lose. Trading index options, which can rapidly fluctuate in value, involves the risk of loss of your entire account.
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Familiarize yourself with the basic nature and price movements of the TSX index option. These options trade by contract months, with open contracts expiring on the third Friday of each of the next three months, plus the third Friday of the first two months of the following quarter. Thus, five possible expiration dates are traded at any one time. The annual index option expires each year in December.
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Option premiums are quoted in Canadian dollars and cents. Strike prices (the index quote at which the option contract settles) are set at every 2.5 index points. A full index point is worth $100 Canadian, the premium multiplier of the index option. If the TSX index rises 10 points, call options (to buy) rise $1,000 in value; put options (to sell) fall $1,000.
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If you are bullish on the Toronto Stock Exchange, buy call options, which are contracts to buy the underlying basket of 60 stocks at a specific strike price by a specific expiration date. If the TSX rises in value, so will your options. The longer out the expiration month, the higher the option premium.
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If you are bearish on the TSX, buy put options, which are contracts to sell the underlying basket of 60 stocks at a specific strike price by a specific expiration date. If the TSX falls in value, your options will rise.
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Tips & Warnings
Don't short index options. This is a needless risk of capital as your potential loss is much greater than your initial investment should the TSX and your option move in the wrong direction. The index option is a straightforward play on the direction of the market. Instead of shorting (selling), go long (buy) calls if you're bullish on the Canadian market and puts if you're bearish.
Always consider commission charges when figuring your potential profit and loss.
Don't invest in index options with your long-term investment capital or retirement funds. An option is a rapidly wasting asset that does not earn income or represent any underlying earnings or corporate growth.
