# School me on stock options...



## Freedom45 (Jan 29, 2011)

I've got some experience with trading, and building my own stock, TFSA, and RRSP portfolios, and a decent general knowledge, but am always interested in learning more.

With that said, one area of trading that I don't fully understand is stock options. Puts, calls, naked puts, etc, etc...

School me.

Or for that matter, can anyone recommend any good books, blogs, websites, etc that one wishing to learn about such things should read?


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## Greyhound86 (Feb 21, 2010)

There are lots of option websites

Here are just a few

http://www.optionseducation.org/default.jsp

http://www.optionsxpress.ca/

http://www.investorplace.com/category/options-trading/options-trading-101/

https://www.borntosell.com/


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## FrugalTrader (Oct 13, 2008)

One thing to note is that you cannot sell puts in a registered account (afaik).


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## I'm Howard (Oct 13, 2010)

Thomsett, CBOE Web Site, http://www.optionsource.com.

Take some courses and work out each trade on paper before you do it.

LEAPS against a stock are a good way to improve on yield.

iTrade have a great options site.

I traded several million a year, keep it simple, Butterflies, condors etc sound great but are rarely profitable.

US Stocks are only way to play, Canadian exchanges are pathetic.


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## plen (Nov 18, 2010)

I signed up for a thinkorswim papermoney account a while ago to practice options, good way to play around as you learn.


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## cannon_fodder (Apr 3, 2009)

I'm Howard said:


> US Stocks are only way to play, Canadian exchanges are pathetic.


Is that because of poor volume? Wide bid-ask spreads? Or is it something else?


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## avrex (Nov 14, 2010)

*Options instruments for do-it-yourself investors.*

In my opinion, Options instruments don't have much of a place in the portfolios for most of us do-it-yourself investors. They are a zero-sum game. No wealth is created. All the money that goes in, comes out in an equal amount. In fact, due to transaction fees, wealth is lost.

However, I believe that Options can be used in certain situations to either hedge a portfolio position or it can also be used to leverage a portfolio position. As long as the user understands the risks involved and the premium (insurance) that we pay to use this instument.

Up to now, I have never employed an Option. However, I plan to make occassional use of Options in the future.

The posts above shares some good links of Options related information. I'd like to ask some specific Options questions/scenarios.

I'd like to make a call out to humble_pie, I'm_Howard and some of the other experienced options users on this forum. I believe these guys are knowledgable and fully understand the risks/rewards in what they are doing. If we can put forward a specific Options question, I'm sure they would be willing to help us better understand Options.

I'll ask my first question .....


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## avrex (Nov 14, 2010)

*Question #1 #2 - Option Process - Option Asssignments*

My first question revolves around the Option process when you are in-the-money and my second question is about Option Assignments.

Scenario:
I purchase 5 call contracts for company ABC at a strke price of $50 at Questrade. I pay $9.99 + (5 * $1) = 14.99 for this right.

Company ABC initially trades at $45 and over time rises to $53. I'm in-the-money and quite happy. The Friday option expiration date arrives. I like Company ABC and am quite willing to keep the stock long in my portfolio.

Question #1: Is there anything that I need to do on Friday? Do I need to contact Questrade about what I want to do? or will I automatically acquire 500 shares of Company ABC @ $50.

Question #2: Questrade charges $12.95 flat for all options assignments. When does this charge apply? Who pays it in the scenario above? If it's me, can I avoid this fee?


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## Freedom45 (Jan 29, 2011)

Thanks for all of the links and suggestions everyone. Not sure if options are something I'll be utilizing going forward or not, but I want to make that decision once I'm fully educated on them.


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## warp (Sep 4, 2010)

I am hardly an expert on options.

However I have read many financial books by writers I respect that advise to stay away from options alltogether.

It has always seemed to me that these financial vehicles are devised to encourage more trading, and therfore more commissions to the same people who devise them.

Its a general rule that if you dont understand an investment, stay away from it.

I would advise that you put togetehr a portfolio of broad ETF's, or build a good asset allocation including solid dividend paying, and div increasing stocks, that you will buy for the long term.

Keep trading costs down, keep taxes down, continue to save and invest intelligently and you probably will be much better off .

Good luck.


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## Argonaut (Dec 7, 2010)

Options seem too expensive to me for a small time investor. The cost of writing a covered call seems to eat too much into the profit of selling it, and you could potentially lose your stock on the other hand. For someone without a six or seven figure portfolio, warrants seem like a better way to get some leverage and potential big upside at a small cost.


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## davext (Apr 11, 2010)

I'm a simple in the money Options trader. I started last year and I've made money on most of my options trades on AAPL, ADBE, OIH, BAC, C, SLW, MGM, LVS, GOOG and a couple others. 

There are a few things that I look for before even considering the trade:

1) since I'm usually buying in the money calls, I have to be confident both fundamentally and technically in the company 
2) volatility, the stock has to move up and/or down a lot before there's a chance of making some money.
3) volume, there has to be a lot of trade volume for the options
4) premium price, I don't want to pay too much of a premium price on any options
5) timing, I'd be interested in buying options that expire in the same week that earnings are reported or options that expire at least a couple months out

I have no doubt that I've been lucky in my trading so far. When the market is going up every month, it's hard to lose money.

To answer another member's question about the in the money call expiring, Questrade will automatically assign you the shares if you do not sell the contract before it expires.


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## MikeT (Feb 16, 2010)

avrex said:


> My first question revolves around the Option process when you are in-the-money and my second question is about Option Assignments.
> 
> Scenario:
> I purchase 5 call contracts for company ABC at a strke price of $50 at Questrade. I pay $9.99 + (5 * $1) = 14.99 for this right.
> ...


In the scenario, you've only calculated the commision. The option itself has a price as well.

Questrade can and does, but is not required to excersize your option for you. If you have enough cash in the account to buy 500 shares at 50 bucks, you should log in and provide your instructions prior to expiration to avoid problems.

The assignment is from the seller's side. If you sold the option, and your option was randomly selected for assignment (to a person who excersized their option), you'd have to provide the shares at the given price, and pay the fee. On your side, the excersizing to buy shares has transaction fees as well.

In general, options are a 'derivative' in a financial sense. But also in a mathematical sense. There is not only a rate of change to expiration, but also a second order in that the daily change of underlying price can imply a change in that first order rate. More generally, the implication in higher option prices is on increased volatility and cheaper prices on decreased volatility.


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## I'm Howard (Oct 13, 2010)

The CBOE offers more variety, more volume, the Canadian Exchanges lack volume, choice.
I settled on Covered Calls, I would be long the stock and write a LEAP against the position, my primary prupose is to improve the yield.
I stayed with a couple of stocks that I wanted to keep in my portfolio but wanted a bit better cash flow.
I am not writing Options at this time, but if I went back in, Calls on GLD and SLV look like a good way to play.


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## cannon_fodder (Apr 3, 2009)

I'm Howard said:


> The CBOE offers more variety, more volume, the Canadian Exchanges lack volume, choice.
> I settled on Covered Calls, I would be long the stock and write a LEAP against the position, my primary prupose is to improve the yield.
> I stayed with a couple of stocks that I wanted to keep in my portfolio but wanted a bit better cash flow.
> I am not writing Options at this time, but if I went back in, Calls on GLD and SLV look like a good way to play.


That seems close to what I'm thinking. I have several positions in Canadian blue chip stocks which yield about 4%. I'd want to sell OTM calls to improve the yield. But I didn't find it obvious which month contract represented the best value. Perhaps that's because of the lack of volume in Montreal led to big spreads between bids and asks.


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## Lephturn (Aug 31, 2009)

avrex said:


> My first question revolves around the Option process when you are in-the-money and my second question is about Option Assignments.
> 
> Scenario:
> I purchase 5 call contracts for company ABC at a strke price of $50 at Questrade. I pay $9.99 + (5 * $1) = 14.99 for this right.
> ...


I am an amateur, but I trade options regularly so I think I can help.

#1: Any broker I've used will automatically assign you the shares in this circumstance if it is in the money at all. Even a penny. Effectively you will automatically acquire the shares at $50 per. In reality I would not recommend this course of action - I would normally sell the option. There is no need to tie up the $5,000 / contract for the stock if assigned. I would rather sell the option and collect the gains. If you still want long exposure you could simply roll that position out - sell your current options before expiration and purchase options further in the future.

Note that unless your option was deep in the money, it will have time value associated with it. That means that every day it gets closer to expiration it loses some value. Just because the stock is at $53.00 doesn't mean that the option's maximum value was $3.00 - it may have been worth more at some point due to time value and volatility, so you may have wanted to sell the option after a sharp move higher that then stalled out.

I have not been trading options long - others like "humble_pie" have been pros so they can offer much more educated opinions than I do - but personally I have never let an option expire that I purchased unless it was almost worthless and far out of the money - IE selling it wouldn't cover the commissions.

#2: It depends on how Questrade does it - I don't have any personal experience with assignment so I don't know who pays. I track all my options and I normally wind up positions before they expire. A good broker (I use OptionsXpress) will even contact you just prior to expiration if you are about to do something dumb and make sure you fully understand the position and what can happen at expiration. A good example is when you are selling options on a position - let's say covered calls on ABC company which is trading at 49.50 and you are heading into the last week before expiration. At some point in the last few days your $50.00 strike call options you are short may become extremely cheap - say under $ 0.10. With the options you originally sold - let's say for $ 0.75 some months ago - now trading for only a few pennies, it would be foolish to risk the last few days for almost nothing. The smart trader buys their short options back when they are only pennies as the money has been made. Many brokers will even reduce or eliminate the commission on closing those short positions for pennies to encourage you to do the right thing. Now if my options are far out of the money at this point I may not buy them back (especially if it is a covered position) but if they are anywhere close that news might move the stock enough to hit them, I buy them back.


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## avrex (Nov 14, 2010)

avrex said:


> Question #1 #2 - Option Process - Option Asssignments


Lephturn, MikeT, thanks for the replies.


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## I'm Howard (Oct 13, 2010)

I used to use ETrade now ITrade, loved their site, any opinions.?


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## cannon_fodder (Apr 3, 2009)

Lephturn

I can understand buying back your options - it's almost like penny stock investing. But I don't understand the comment about "doing the right thing".


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## humble_pie (Jun 7, 2009)

to freedom, the original poster:

no one can school you. There are so many tricky little details in options that volumes are required to explain.

experience is by far the best teacher. Can you consider a small covered write against part of a stock that you presently hold. Strategy is especially suitable if one believes that markets will churn sideways for the next few months.

pick a stock that you wouldn't mind selling at a price, say, 10-15% higher than its current price before, say, next august or september. Make sure you will be comfortable with the taxation consequences if that stock were to be assigned (you will sell & deliver said stock.) 

imho as a pilot project it would be best to sell only a few contracts against a holding. For example, if one holds 1000 shares of XYZ, one might sell 2 or 4 OTM call contracts just so as to learn how stuff works.

if your underlying stock is interlisted, be sure to check whether US options exist. If so, compare US vs canadian options. US options markets are more efficient due to higher volumes, so if there is a choice the majority of canadian option players will go to US options.

the Best Little Short Book about options is a freebie from the montreal exchange.

http://m-x.ca/f_publications_en/en.guide.options.pdf

if you don't like embedded links (i don't) go to m-x.ca, click education - guides & strategies - equity derivatives & you'll see the pdf "Equity Options Reference Manual."

it's only 50 pages but it travels from basic introduction to the greeks & beyond.

i have also noticed that there are some excellent webinars on the montreal exchange website. For everyone from novice to advanced.


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## humble_pie (Jun 7, 2009)

a note to avrex:

i don't know about the zero-sum critique. It seems to me that diehards have used this argument against stock exchanges themselves and against investing in general. So the expression becomes meaningless.

to me options have value. In stable or slightly or moderately rising markets, or in slightly or moderately falling markets, the option seller is continually harvesting premiums from the tops & bottoms of the trading bands.

about twice a decade some gigantic crisis blows up & all bets fly out of the window. These are unsettling times for option players. If truth be told, i for one rather like these upheavals as they do force one to be super-nimble. 

turning now to your scenario, which is about buying calls. In general, studies have shown that it is the buyers of options who lose money. They are betting on a short term swing. On a long term basis, it will always be the sellers of options who consistently make money.

in your example, if ABC is a reasonably good payor of eligible canadian dividends, one might want to be long stock plus continually selling OTM calls and a few OTM puts. This is the turtle that wins the race.

statistically, the chances of timing a sharp upswing in ABC stock & buying the calls to take advantage of that upswing are not as cheery. This is the hare that lost the race. (speak to the numerous Indexers in this forum & they will din into your ears, if you haven't already heard, that the average investor cannot beat the indexes, so he might as well give up & join em.)


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## avrex (Nov 14, 2010)

Ya, my 'buy a call' scenario above, was just to help me understand the option process, with respect to the expiry dates and the option assignments.



humble_pie said:


> experience is by far the best teacher. Can you consider a small covered write against part of a stock that you presently hold.


That is exactly what I was thinking.
I am planning on performing the occassional write/sell of a covered call in my RRSP, to gain some premium. I'll follow the same advice that you gave 'freedom' above and learn (slowly) through experience. I'll also check out those reference links you mentioned.

Thanks humble. I always like to hear your thoughts/opinions.


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## Causalien (Apr 4, 2009)

A lot of option's profitability have to do with the cost of commission. If you are trading out of the money options or when you get into multi leg strategies that demands about 4~5 different options per leg. Now if you are selling some type of iron condor that have both call and put, the commissions can eat up all your profit.

So I suggest finding a specialized broker. ThinkOrSwim and Option house are both good for exactly this. Although there are some restrictions with these two. Mainly the fact that they trade only in US markets. But then again, you wouldn't want to trade Canadian options due to the low liquidity.

Still, I wouldn't suggest anyone to do options with real money right away. It took about 3 years of practice for me to get good at it. I strongly suggest using a simulator first. One of my friend had 300k wiped out trading options on his first year because he was trading it like he'd do with stocks.


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## Argonaut (Dec 7, 2010)

Let's go with a concrete example of a covered call here. The August BCE 39 call is priced at $0.22 for the ask, and $0.17 for the bid. BCE's current price is $35.49.

If I had 100 shares of BCE, that would be a market value of $3549. Writing a call on Questrade would cost $9.95 + $1 = $10.95. Selling that August call would only net me $22 even if the bid met the ask. The price of the option alone would be half of the gain! And all upside above $39 would be lost. How is this a good deal at all?

Perhaps the options experts are right in that the American markets are the only way to play it. But it seems one should stay away from options unless they have large portfolios. Unless my calculations are wrong somewhere?

On the other hand, I like warrants. Goldcorp warrants rocked today.


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## Causalien (Apr 4, 2009)

at .22 or .17, it is really not worth it. I usually only write an option if it will present me with 5% profit after commissions. Here, you are getting into the most interesting part. Your comission structure at $9.95 per trade requires you to trade at least 10 options to keep the comission low enough to be worth it. If you can find one that cost only $5, you can then make a profit with 5 contracts. If you can find one that has a base of 0 and charges only .75 per contract, then you can probably do the 1 contract trade.

.22 for a $39 mark option is a bit low. For that price, I'd like at least .70 for a good profit, but then again, you are also trading a contract that's very out of the money. This innate ability to know that the option price is low or not comes from experience. Sure, you can do it with some algorithm, but algorithm can be wrong. 

I guess, the other unmentioned part about option is that you need huge amounts of capital for the safer plays. Each of my trade involves at least $25k minimu and $50k normally.

Whereas if you are simply betting on momentum with at the money trades, then you don't need as much.

Hope this helps.




Argonaut said:


> Let's go with a concrete example of a covered call here. The August BCE 39 call is priced at $0.22 for the ask, and $0.17 for the bid. BCE's current price is $35.49.
> 
> If I had 100 shares of BCE, that would be a market value of $3549. Writing a call on Questrade would cost $9.95 + $1 = $10.95. Selling that August call would only net me $22 even if the bid met the ask. The price of the option alone would be half of the gain! And all upside above $39 would be lost. How is this a good deal at all?
> 
> ...


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## cannon_fodder (Apr 3, 2009)

I'm Howard said:


> The CBOE offers more variety, more volume, the Canadian Exchanges lack volume, choice.
> I settled on Covered Calls, I would be long the stock and write a LEAP against the position, my primary prupose is to improve the yield.
> I stayed with a couple of stocks that I wanted to keep in my portfolio but wanted a bit better cash flow.
> I am not writing Options at this time, but if I went back in, Calls on GLD and SLV look like a good way to play.


Did you only work with US-listed stocks or did you also use interlisted stocks? I believe most of the stocks with which I'd like to employ a similar strategy would be interlisted.

I think the idea of just dipping my toe in the water by writing LEAPs only against a minor percentage of my holdings would be a good idea, too. Typically I have 1000 shares in each stock. So putting 200 shares at risk hopefully be enough to get an education without risking my long positions.


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## I'm Howard (Oct 13, 2010)

I only wrote U.S Options, I used ETrade for the discount, most of my action was in straddles, mainly Bull, and I never wrote a contract of less than 10.

I used a board, some may prefer a cimputer, but i clearly wrote out the strategy and examined it in detail.

i only sold when I maxed out on what I could make or when it came one day to expiry.

The major challenge is to find a couple of stocks you like and become an expert.

Check the premiums closely, many times they may not be worth the effort.

I have sold LEAPS within the last two weeks against my BP , which I bought at the height of the spill, look for Fallen Angels.


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## humble_pie (Jun 7, 2009)

argo bce is not a typical option example. Low beta stock. Option premiums are zip. On a bell curve bce & its kin would be far out on the flat extreme left.

i do hold bce. It's a widely-held lumbering old behemoth with a high div. One can enrich the yield somewhat - by about 2% per annum - by selling an OTM combo of calls & puts that are far out in time. Right now i am planning to roll over my late spring bce calls into jan 2012 leaps options w higher strike price. I'll do this before bce goes X in early march. As you would see from the option chain, the 2012 premiums are significently higher than the few pennies you found for an august far-out-of-the-money call. I haven't yet decided which strike to sell. I haven't yet decided, either, whether i'll sell more OTM puts or just let the present ones, which are far below-the-money, expire.

bce w options is a steady, predictable, no-brainer of a pot-boiler. My cost base in bce is still under 30 so i am getting a current return of around 8.25% on the divs-plus-options combo, without taking into consideration the strong notional or paper increase in the value of the unsold stock.

as it happens, i like no-brainer pot-boiler stocks w options because these positions are ultra low-maintenance. Such positions are almost bond-like in their somnolence. This frees me up for the more interesting stuff.

somewhere in this forum, lephturn has a few posts on collaring no-brainer stocks in rrsps. He was using bce as an example. A true collar will nail down a stock's high dividend yield while guaranteeing protection against any drop in the underlying stock. I don't quite agree with leph because puts have risen so dramatically in price in recent years that a true collar now costs debit money (time was when a true collar could be put on for a credit spread.)

to his credit lephturn is picking through his put options & he is finding puts to include in a collar that ease his position, even though they don't quite protect perfectly on the downside. I don't practice this myself because i for one can tolerate market dips & crashes, but i can certainly appreciate the merits of what leph is doing.

to make a long story short, bce w options does have a conservative place in an option investor's portfolio.

.


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## Argonaut (Dec 7, 2010)

I guess I'm just not willing to go closer to the money than $39. A 10% gain in 6 months is certainly not far-fetched in my mind. Anyway, seems like the biggest winner in options are the brokers if you're a small guy.


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## avrex (Nov 14, 2010)

plen said:


> I signed up for a thinkorswim papermoney account a while ago to practice options, good way to play around as you learn.


Agreed. 
That's a nice web application. In fact, the downloadable desktop application is even better. I'm playing around with the thinkBack function, and testing scenarios using historic option prices.

I wonder when TD will bring thinkorswim Canada above water, so that Canadians can open accounts here at home.


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## Causalien (Apr 4, 2009)

avrex

There's an orange button at the top right side of your desktop app called OnDemand. This zooms the whole platform back in time to any date you wish and you can simulate the price actions of any stock/option/futures movement of that day to the increment of 5 seconds. 

I think it is a better simulator function.


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## Lephturn (Aug 31, 2009)

cannon_fodder said:


> Lephturn
> 
> I can understand buying back your options - it's almost like penny stock investing. But I don't understand the comment about "doing the right thing".


Ah - by that I mean close your short options position when the option is almost worthless to remove the remaining risk. If you sold the option 2 months ago, but it is worth only pennies a week before expiration, it's silly to leave that risk on the table for almost no financial reward. By leaving it open, you leave yourself open to a "black swan" type event - very rare but can move the option massively. It's bad for you and for your broker to leave that risk out there - as if you get hit it could not only be a big draw-down for you, but could end up with the brokerage losing a customer.


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## avrex (Nov 14, 2010)

Causalien said:


> There's an orange button at the top right side of your desktop app called OnDemand.
> I think it is a better simulator function.


I've registered with thinkorswim Canada. 
Unfortunately, it looks like they have deferred accepting new account applications, at this time. So, they don't have 'Live Trading' accounts. I'm running the 'paperMoney' account.

From what I've been able to google, it seems like the OnDemand function is only available on the 'Live Trading' account and not the 'paperMoney' account.

Causalien, can I assume that you have an account with thinkorswim TD Ameritrade in the US?

I didn't think they allowed Canadian residents to sign up there (i.e. they redirect us to sign up with the Canadian website).


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## humble_pie (Jun 7, 2009)

avrex tos says it can accept all-US accounts right now from canadians. It's canadian markets that they're working on integrating into the platform. But the US trading platform is good to go. Phone them if you're interested, they'll explain ...


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## RichmondMan (Jan 31, 2011)

Somewhere along the line last month I met some really good web for options: http://www.optionsource.com/ 

And here very useful book for you: Understanding Stocks by Michael Sincere, I think. Good luck with your stocks activities.


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## Causalien (Apr 4, 2009)

What humble pie said.
But you won't get real time data if it is not funded ($3000 last I checked).
TOS is for options and futures. Naturally I don't want to trade canadian options and futures market because they are too illiquid. (I am not aware if there even is one, never looked and never needed to). That deferred acception could be due to their integrating the Canadian markets. They said it'd be done the 1st half this year. 

In any case, their competitor, optionhouse is the aternative if you just want to trade. However, TOS is too good of a platform to ignore. You can even get prodigio, an automated trading platform, to trade for you.

I had a US TOS account that was grandfathered into the current TD TOS system, I am not sure where it stands and what capabilities are not present in a newer account. I've had to call them and had to activate numerous function for me over the years so some might not be available for new ones. Benefits of being with them since the Beta.


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