What dictates the costs of creating an options contract? (Commissions breakdown)
I'm not positive my answer is complete, but from information on my broker's website, the following fees apply to a US option trade (which I assume you're concerned with given fee in dollars and the mention of the Options Clearing Corporation): They have more detail for other countries -- see https://www.interactivebrokers.co.uk/en/index.php?f=commission&p=options1 for North America.  Use the sub-menu near the top of the page to pick Europe or Asia. The brokerage-charged commission for this broker is as low as $0.25 per contract with a $1.00 minimum.  Though I've been charged less than $1 to STO an options position, as well as less than $1 to BTC an options position, so not sure about that minimum. Regarding what I read as your overall underlying question (why are option fees so high), in my research this broker has one of the cheapest commission rates on options I've ever seen.  When I participate in certain discussions, I'm routinely told that these fees are unbelievable and that $5.95, $7.95, or even $9.95 are considered low fees.   I've heard this so much, and discussed commissions with enough people who've refused to switch brokers, that I conclude there just isn't enough competition to drive prices lower.  If most people won't switch brokers to go from $9.95 to $1 per trade, there simply isn't a reason to lower rates.
"In general economic theory, there are always two markets created based on a need for a good; a spot market (where people who need something now can go outbid other people who need the same thing), and a futures market (where people who know they will need something later can agree to buy it for a pre-approved price, even if the good in question doesn't exist yet, like a grain crop). Options exist as a natural extension of the futures market. In a traditional future, you're obligated, by buying the contract, to execute it, for good or ill. If it turns out that you could have gotten a lower price when buying, or a higher price when selling, that's tough; you gave up the ability to say no in return for knowing, a month or three months or even a year in advance, the price you'll get to buy or sell this good that you know you need. Futures thus give both sides the ability to plan based on a known price, but that's their only risk-reduction mechanism. Enter the option. You're the Coors Brewing Company, and you want to buy 50 tons of barley grain for delivery in December in order to brew up for the Super Bowl and other assorted sports parties. A co-op bellies up to close the deal. But, since you're Coors, you compete on price with Budweiser and Miller, and if you end up paying more than the grain's really worth, perhaps because of a mild wet fall and a bumper crop that the almanac predicts, then you're going to have a real bad time of it in January. You ask for the right to say ""no"" when the contract falls due, if the price you negotiate now is too high based on the spot price. The co-op now has a choice; for such a large shipment, if Coors decided to leave them holding the bag on the contract and instead bought it from them anyway on a depressed spot market, they could lose big if they were counting on getting the contract price and bought equipment or facilities on credit against it. To mitigate those losses, the co-op asks for an option price; basically, this is ""insurance"" on the contract, and the co-op will, in return for this fee (exactly how and when it's paid is also negotiable), agree to eat any future realized losses if Coors were to back out of the contract.  Like any insurance premium, the option price is nominally based on an outwardly simple formula: the probability of Coors ""exercising"" their option, times the losses the co-op would incur if that happened. Long-term, if these two figures are accurate, the co-op will break even by offering this price and Coors either taking the contract or exercising the option. However, coming up with accurate predictions of these two figures, such that the co-op (or anyone offering such a position) would indeed break even at least, is the stuff that keeps actuaries in business (and awake at night)." Concerning the Broker: eToro is authorized and registered in Cyprus by the Cyprus Securities Exchange Commission (CySEC). Although they are regulated by Cyprus law, many malicious online brokers have opened shop there because they seem to get along with the law while they rip off customers. Maybe this has changed in the last two years, personally i did not follow the developments. eToro USA is regulated by the Commodity Futures Trading Commission (CFTC) and thus doing business in a good regulated environment. Of course the CFTC cannot see into the future, so some black sheep are getting fined and even their license revoked every now and then. It has no NFA Actions: http://www.nfa.futures.org/basicnet/Details.aspx?entityid=45NH%2b2Upfr0%3d Concerning the trade instrument: Please read the article that DumbCoder posted carefully and in full because it contains information you absolutely have to have if you are to do anything with Contract for difference (CFD). Basically, a CFD is an over the counter product (OTC) which means it is traded between two parties directly and not going through an exchange. Yes, there is additional risk compared to the stock itself, mainly: To trade a CFD, you sign a contract with your broker, which in almost all cases allows the broker A CFD is just a derivative financial instrument which allows speculating / investing in an asset without trading the actual asset itself. CFDs do not have to mirror the underlying asset's price and price movement and can basically have any price because the broker quotes you independently of the underlying. If you do not know how all this works and what the instrument / vehicle actually is and how it works; and do not know what to look for in a broker, please do not trade it. Do yourself a favor and get educated, inform yourself, because otherwise your money will be gone fast. Marketing campaigns such as this are targeted at people who do not have the knowledge required and thus lose a significant portion (most of the time all) of their deposits. Answer to the actual question: No, there is no better way. You can by the stock itself, or a derivative based on it. This means CFDs, options or futures. All of them require additional knowledge because they work differently than the stock. TL;DR: DumbCoder is absolutely right, do not do it if you do not know what it is about. EDIT: Revisiting this answer and reading the other answers, i realize this sounds like derivatives are bad in general. This is absolutely not the case, and i did not intend it to sound this way. I merely wanted to emphasize the point that without sufficient knowledge, trading such products is a great risk and in most cases, should be avoided. While open interest usually correlates to volume, the mark of liquidity is the bid ask spread. Even when trading options with spreads as large as an ask 2x the bid, a more realistic price that traders are willing to accept lies somewhere in the middle. Any option can easily be exited at intrinsic value: underlying price - exercise price for calls, exercise price - underlying price for puts.  For illiquid options, this will be the best price obtained.  For longer term options, something closer to the theoretical price is still possible. If an underlying is extremely liquid, yet the options aren't quite then options traders will be much more ready to trade at the theoretical price. For exiting illiquid options, small, < 4 contracts, and infrequent, > 30 minute intervals, orders are more likely to be filled closer to the theoretical price; however, if one's sells are the only trades, traders on the other side will take note and accept ever lowering implied volatilities. With knowledge of what traders will accept, it is always more optimal to trade out of options rather than exercise because of the added costs and uncertainty involved with exercising and liquidating. "Is option trading permitted in the account? Most 401(k) do not permit this. 1 - it means none traded today. 2 - there are 50 outstanding contracts. Each one has a guy who is long and a guy who is short.  3 - not really, it might depend on the stock.  4 - no. With commissions so low, and the inherent leverage of options, one contract reflecting 100 shares of the underlying stock, the minimum is what you can sleep soundly with.  5 - because GLD does not reflect precisely 1/10 oz of gold's price. If you look at the prospectus, it reads ""The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the Trust’s expenses."" Since there are no dividends to take expenses from, the GLD price will erode by .4% each year compared to the price of 1/10oz gold." They're all in one place. The OCC provides: http://www.optionsclearing.com/webapps/flex-reports "There's no free lunch. Here are some positions that should be economically equivalent (same risk and reward) in a theoretically-pure universe with no regulations or transaction costs: You're proposing to buy the call. If you look at the equivalent, stock plus protective put, you can quickly see the ""catch""; the protective put is expensive. That same expense is embedded in the call option. See put-call parity on Wikipedia for more: http://en.wikipedia.org/wiki/Put%E2%80%93call_parity You could easily pay 10% a year or more for the protection, which could easily eat up most of your returns, if you consider that average returns on a stock index might be about 10% (nominal, not real). Another way to look at it is that buying the long call and selling a put, which is a synthetic long position in the stock, would give you the put premium. So by not selling the put, you should be worse off than owning the stock - worse than the synthetic long - by about the value of the put premium. Or yet another way to look at it is that you're repeatedly paying time value on the long call option as you roll it. In practical world instead of theory world, I think you'd probably get a noticeable hit to returns just from bid-ask and commissions, even without the cost of the protection. Options cost more. Digressing a bit, some practical complications of equivalency between different combinations of options and underlying are: Anyway, roughly speaking, any position without the ""downside risk"" is going to have an annual loss built in due to the cost of the protection. Occasionally the options market can do something weird due to supply/demand or liquidity issues but mostly the parity relationships hold, or hold closely enough that you can't profit once expenses are considered. Update: one note, I'm talking about ""vanilla"" options as traded in the US here, I guess there are some somewhat different products elsewhere; I'm not sure exactly which derivatives you mean. All derivatives have a cost though or nobody would take the other side of the trade." Charging very high prices for additional standard services: See Commission & Fees: https://brokerage-static.s3.amazonaws.com/assets/robinhood/legal/RHF%20Retail%20Commisions%20and%20Fees%20Schedule.pdf Link is down in the footer, to the left... You appear to be thinking of option writers as if they were individuals with small, nondiversified, holdings and a particular view on what the underlying is going to do.  This is not the best way to think about them. Option writers are typically large institutions with large portfolios and that provide services in all sorts of different areas. At the same time as they are writing calls on a particular stock, they are writing puts on it and options on other stocks.  They are buying and selling the underlying and all kinds of different derivatives.  They are not necessarily writing the option because they are expecting or hoping to benefit from a price move.  It's just small part of their business.  They write the option if the option price is good enough that they think they are selling it for very slightly more than it's worth.   Asking why an option writer creates a call is like asking why a grocery store keeps buying groceries from their distributors.  Don't they know the price of food may not always rise?  Sure, but their business is selling the food for slightly more than they pay for it, not speculating on what will happen to its price.  Most option writers are doing the same thing, except what they are buying and selling is sets of cash flows and risk.   As a general rule, the business model of option writers is to profit from the few cents of spread or mispricing, not from aggregate changes in the price of the underlying.  They should and often do maintain balanced portfolios so their option writing activities don't expose them to a lot of risk. Also note that there could be lots of reasons for writing options, even if you do have a particular view.  For example, perhaps the option writer thinks volatility of the underlying will decrease.  Writing a call could be part of an overall strategy that profits from this view.