How To Buy & Sell Stock Options Online

A revolution has occurred during the last 10 years or so within the brokerage industry. Commissions have fallen dramatically and online trading has made buying and selling securities, particularly stock options, faster and easier.

When I was about 10 or 12 years old, I asked a full service broker for a commission schedule. I had already been hit with $100 to $200 commission charges on "market" orders, and I believed it made sense to tailor the number of shares I was buying to the optimal commission threshold. However you would have thought I asked for the guy's Social Security Number and bank card number based on the look he gave me. Then his response was something like, "There's simply too many factors affecting the fee … you should just place your order and I'll try to get you a good rate." …. What a crock!! Even at age 10, I knew enough to never purchase through that guy again. By the time I graduated from college, I sold everything I had brought through that brokerage firm and never went back.

Today, the stock broker's world has turned upside down. You can trade securities your self online for as little as $12, $7, $5, and even for free (up to a certain number of trades per month or per year) based mostly on the brokerage firm you pick. Of course, whenever you trade on-line, there's no one second guessing you (yea!!), and you can make mistakes (be careful). In this article, I'm going to discuss the nuances of trading stock options online.

Whenever you buy and sell stocks on-line, everything's pretty simple; just specify whether or not you wish to buy or sell, the ticker symbol for the stock, whether it's a "market" order (i.e., buy at the current "ask" price or sell at the current "bid" price), and whether or not the order is good today only or till you cancel it.

Stock option orders, however, require a little extra information. Basically, you must specify: the stock, call or put, strike price, expiration month, and "market" order or "limit" order and premium you want. If you're using a combination of options, it will get a little more complex. I'll talk about each of these items below.

Let's begin with opening an online trading account …

This part is pretty simple. You first choose an online brokerage firm. You can search for articles that assess the different brokerage firms based on commissions, quality of customer support, pace of filling orders, quality of user interface, etc. Basically, I recommend you first search for "deep discount" brokers with very low commissions (or even free trades per month or year). You can also go with "discount" brokers if you think you might want more help in placing orders, however you will pay more for every transaction and I doubt you'll need "help" very long.

Three deep discount brokers I've worked with include Wells Fargo, ETrade, and Zecco Trading. Wells Fargo gives up to a hundred free stock trades per year, however their online software is incapable of making several important, though slightly advanced option trades. For instance, you can't sell naked puts or place spread orders online. Nevertheless, customer support is pretty good. ETrade has good customer service and a great deal of powerful research features, but they cost a little more and don't have any free trades (to my knowledge). If you are going to get into serious stock options trading, Zecco Trading is the best I've found when it comes to "ease of placing advanced orders" and getting orders filled. Basic option purchases, selling naked, credit spreads and debit spreads, collars, straddles, and strangles are all straightforward at Zecco. They even have butterfly and iron condors available although I haven't used them so far. Plus, you get some number of free trades each month and option trades are only $4.50 plus a few pennies per contract. Zecco customer service is okay.

Once you have selected an online broker, complete an application to open an account. If you are going to trade options, you will also have to complete a Margin Account application and an Options Account application. If you want unlimited options trading privileges, you will want to mark your investment objectives to include "speculation", and you have to to claim you have options trading experience. Some options privileges (e.g., selling naked puts) would require large balances too.

Once your account is opened and funded, you'll be able to start trading. The following dialogue outlines how to place several types of stock option orders online.

1. Buying puts and calls. This is the simplest type of option trade. You purchase a call if you think the stock is going up and you buy a put if you think the stock price is going down. Each contract is worth 100 shares of stock; please note, this isn't true for commodities option contracts (e.g., silver, corn, rice, orange juice, etc.). To purchase an option, you need to specify the following:

Quantity: What number of contracts are you buying?
Month: In which month and year does the contract expire?
Stock: What is the underlying stock?
Strike price: This is the price reflecting the cost of the underlying stock.
Call or Put: Which type of contract are you buying?
Order Type: Market order or Limit order (specify the premium you're willing to pay)
Premium: What price are you willing to pay?
Term of the Offer: Day order (good for the rest of the trading day) or Good Til Cancelled (GTC: Means the order will stand day after day till filled or till you cancel it)

Example: BUY 2 June2011 XYZ 50 Calls for $2.90 (giving a price implies a Limit order) Good Til Cancelled

2. Selling Puts and Calls. A basic sell order works precisely like the basic purchase except you state you're selling instead of buying.

Example: SELL 2 June2011 XYZ 50 Calls for $2.60 (giving a price implies a Limit order) Good Til Cancelled

3. Buying or Selling Spreads. A spread is a simultaneous buy and sell of different options as a single order where you specify your premium as a net difference between the premiums of the individual options.

For example, let's say you wish to buy a 25 call and sell a 30 call for XYZ stock assuming the premiums are as stated below:

XYZ 25 Call: $2.50 bid x $3.00 ask
XYZ 30 Call: $1.00 bid x $1.30 ask

As a market order, you would pay $3.00 for the 25 call and receive $1.00 for the 30 call. Your net cost would be $3 - $1 = $2 per contract (i.e., $200 net cost per contract since each contract represents 100 shares). But we already know you can beat the market price, so let's attempt to buy the 25 call for $2.80 and sell the 30 call for $1.10. The difference is $2.80 - $1.10 = $1.70. So your order would look like this:

SPREAD order to BUY 3 Jun2011 XYZ 25 Calls and SELL 3 Jun2011 XYZ 30 Calls for a net difference of $1.70 Good Til Cancelled.

If your order is filled, you will pay a maximum of $1.70 per contract (i.e., $170 considering every contract is 100 shares of stock). Notice this is $130 less than the market order would have cost you. Since the position took money out of your pocket, this is a "debit" spread, and since both calls expire in the same month, it is a "vertical" spread. If the months were totally different, it would be a "calendar" spread.

So you have entered a vertical debit spread for a net cost of $170 per contract (plus commissions). For a spread order, you don't care what the individual option prices were. For example, your 25 call might have cost $3.00 (the Ask price) while you sold the 30 call for $1.30 (also the Ask price), however you don't care because your "Net Cost" was only $1.70.

If you sold the 25 Call and bought the 30 Call "as insurance" instead … perhaps you think the stock is not going to rise in price and may even fall … then you'll receive more money for the 25 call than the 30 call cost you. This position places money in your pocket; thus, it is known as a "credit" spread.

For example, if your order looked like this:

SPREAD order to SELL 3 Jun2011 XYZ 25 Calls and BUY 3 Jun2011 XYZ 30 Calls for a net difference of $1.70 Good Til Cancelled.

Then you receive $170 into your account for every contract pair in your position. Since both options expire in June, this is a "vertical credit" spread. If they had completely different expiration dates, it would be a "calendar credit" spread.

Identical to with the debit spread, you don't care what the individual premiums were; you only care about the premium difference.

3. All other pure option orders. Pretty much all other combinations of options work the same way as explained above; they are either outright options buys or sells or spreads. The more complex stuff like butterflies and iron condors are just combinations of spreads as far as placing the order goes. Straddle and strangle orders work the same way as spread orders, they're just different combinations of options.


These are the fundamentals of how to trade stock options on-line and place several types of stock option orders. For more information concerning which strategies to use and which options to select, refer to my option strategies articles.