4 Ways to Trade Options

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The tools and resources you need to better manage risk and generate open options trading.

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About Options collapse An option is a contract enabling the purchase or sale of a specific security at a specific price during a specific time period. In the options market, the two words, "option" and "contract" mean the same thing and they are used interchangeably.

Options and Risk Options involve risk and are not suitable for all investors. Copies of this document are available by clicking here.

4 Ways to Trade Options

Holders and Writers The purchaser of an opening position in an options contract is called the "buyer" or "holder. The buyer pays a premium in order to buy the option, which gives them a right that they can exercise during the life of the contract.

The investor who sells the contract to open is called the "seller" or "writer. The writer receives a premium for writing the option, as compensation for the obligation they have taken on. When the Number of Shares and Strike Price Can Change Although most of the time each contract represents shares of the underlying stock at a specified strike price, there are times when the strike price, the number of shares deliverable or both can change depending on such events as stock splits and stock dividends.

Premiums The "premium" is the dollar amount that a buyer pays to a writer for the right to purchase or sell a specified open options trading of the underlying security, at a specified price, for a specific time period. open options trading

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Options Type collapse The most familiar options are those issued on common stock. These are known as "equity options. Option Contracts There are two types of option contracts: a "Call" and a "Put.

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If you write a call, you are accepting the obligation to sell the stock to the call buyer at the strike price at any time up to the expiration date as determined by the expiration month of the option you sell. Puts: If you buy a Put, you are buying a contract that gives you the right to sell shares usually of a specific stock to the put writer at any time up to the expiration date as determined by the expiration month open options trading the option you buy. If you write a put, you are accepting the obligation to buy stock from the put buyer at the strike price at any time at the buyer's discretion up to the expiration date as determined by the expiration month of the option you sell.

Glossary collapse American-style option An open options trading contract that can be exercised at any time between the date of purchase and the expiration date.

Most exchange-traded options are American style. Assignment The receipt of an exercise notice by an options writer that requires him to sell in the case of a call or purchase in the case of a put the trend lines examples security at the specified strike price.

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At the money An option is at-the-money if the strike price of the option is equal to the market price of the underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.

(Or Where Do Options Go When They Die?)

Call option An option contract that gives the holder of the option the right but not the obligation to purchase, and obligates the writer to sell, a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract. Closing purchase A transaction in which the purchaser's intention is to reduce or eliminate a where to make money in 2 weeks position in a stock, or in a given series of options.

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Closing sale A transaction in which the seller's intention is to reduce or eliminate his long position in a stock, open options trading a given series of options.

Covered call A short call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it. Covered put A put option position in which the option writer also is short the corresponding stock or has deposited, in a cash account, cash or cash equivalents equal to open options trading exercise price of the option.

This limits the option writer's risk because money or stock is already set aside.

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In the event that the holder of the put option decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put option. Equity Options Securities that give the holder the right to buy or sell a specified number of shares of stock, at a specified price for a certain limited time period.

Typically one option equals shares of stock.

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European-style option An option contract that can only be exercised on the expiration date. Exercise To implement the right of the holder of an option to buy in the case of a call or sell in the case of a put the underlying security.

Other Options Considerations The commission structure for options trades tends to be more complicated than its equivalent for stock trades.

Expiration cycle An expiration cycle relates to the dates on which options on a particular security expire. As an example, a given option may be placed in 1 of 3 cycles; the January cycle, the February cycle, or the Open options trading cycle. At any point in time, an option may have contracts with 4 expiration dates outstanding, 2 in near-term months and 2 in far-term months.

Expiration date The last day in the case of American-style or the only day in the case of European- style on which an option may be exercised.

Call or visit a branch Call us: Options Discover how to trade options in a speculative market The options market provides a wide array of choices for the trader. Like many derivatives, options also give you plenty of leverage, allowing you to speculate with less capital. As with all uses of leverage, the potential for loss can also be magnified. When the buyer of a long option exercises the contract, the seller of a short option is "assigned", and is obligated to act.

For stock options, this date is the Saturday immediately following the 3d Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of an option holder's intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday. In-the-money A "call" option is in-the-money if the strike price is less than the market price of the underlying security.

A "put" option is in-the-money if the strike price is greater than the market price of the underlying security. For example, an xyz "call" option with a 52 strike price is open options trading when xyz trades at An xyz "put" option with a 52 strike price is in-the-money when xyz is trading at Margin requirement options The amount of cash an uncovered naked option writer is required to deposit and maintain to cover his daily position valuation and reasonably foreseeable intra- day price changes.

Opening purchase A transaction in which the purchaser's intention is to create or increase a long position in a given series of options. Opening sale A transaction in which the seller's intention is to create or increase a short position in a given series of options.

Option Gives the buyer the right, but not the obligation, to buy or sell stock at a set price on or before a given date.

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Investors, not companies, issue options. Investors who purchase call options expect the stock will be worth more than the price set by the option the strike priceplus the price they paid for the option itself. Buyers of put options expect the stock's price will go down below the price set by the option.

  1. There will simply be as many option contracts as trader demand dictates.
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Out of the money A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

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Premium The price of an option contract, determined on the exchange, which the buyer of the option pays to the option writer for the rights to the option contract. Put option An option contract that gives the holder the right to sell or "put"and places upon the writer the obligation to purchase, a specified number of shares of the underlying stock at the given strike price on or before the expiration date of the contract. Strike price The stated price per share for which underlying stock open options trading be purchased in the case of a call or sold in the case of a put by the option holder upon exercise of the option contract.

Uncovered call A short call option position in which the writer does not own shares of underlying stock represented by his option contracts. Also called a "naked" call, it is much riskier for the writer than a covered call, where the writer owns the underlying stock. If the buyer of a call exercises the option to call, the writer would be forced to buy the stock at market price.

Uncovered put A short put option position in which the writer does not have a corresponding short stock position or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

Discover how to trade options in a speculative market

Also called "naked" puts, the writer has pledged to buy the stock at a certain price if the buyer of the options chooses to exercise it. The risk is limited to the value of the stock that the writer must purchase in the event that the option is exercised.

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Underlying security Options: the security subject to being purchased or sold upon exercise of an option contract. Depositary receipts: The class, series and number of the foreign shares represented by the depository receipt. Before trading options, please carefully review the Options Account Agreement contained in the Customer Agreements and Disclosure Documents brochure.

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Commission-generating trades are buys and sells of: Equities, Options, Mutual Funds subject to commissions and Fixed Income instruments. You must re-qualify each calendar quarter. New qualification status will be effective on the second business day of the calendar quarter. Fees for US transactions are charged in US dollars.