About Options

An option is a contract which gives the buyer the right to purchase the underlying stock at a specific price for a set period of time. If the option is not exercised by this set date, it expires and no longer has value.

There are two basic types of options: Calls and Puts. "Calls" give the holder the right to buy the underlying stock for the Strike Price. "Puts" give the holder the right to sell the underlying stock for the Strike Price. The Strike Price is the price per share at which the underlying stock can be bought or sold by the holder if he/she chooses to exercise this right.

Once a position is opened ("Buy to Open" or "Sell to Open"), it remains viable until it expires, unless a closing transaction ("Buy to Close" or "Sell to Close") is made. If a closing transaction is not made before the expiration date, one of two things occurs at that time. 1) If the option is "in the money" (for the contract holder, not the issuer), the option is exercised and shares are bought/sold for the agreed on price. 2) If, however, the option is "out of the money" (for the contract holder, not the issuer), the contract simply expires with no further action. Either way, the issuer keeps the premium.

Options carry a high level of risk and are not suitable for all investors, and certain requirements must be met to trade options. Read the Options Disclosure Document before considering options trading.

Option Order Actions

Buy To Open

This action opens a new position.

Calls -- When you "Buy to Open" a Call, you gain the right to buy a set amount of shares at the Strike Price anytime before the expiration date. This action anticipates an upward rise in stock price. Example: For stock XYZ, you buy one (1) option contract (+XYZFX) -- which is an XYZ July 50.00 Call. For this option, the Strike price is $50.00, and the premium is $3.50 per contract (or $350.00 where one contract equals 100 shares). You would pay the premium of $350.00 for the option up front. Thereafter, you would have the right to buy XYZ stock for $50.00 per share (or $500.00) anytime before the contract expires, although you are not obligated to do so.

Puts -- When you "Buy to Open" a Put, you gain the right to sell a set amount of shares at the Strike Price anytime before the expiration date. This action anticipates a downward fall in stock price.
If you do not own these shares when you sell the contract, the option is called a "Naked Put".Example: For stock XYZ, you buy one (1) option contract (+XYZRX) -- which is an XYZ July 50.00 Put. For this option, the Strike price is $50.00, and the premium is $4.50 per contract (or $450.00 where one contract equals 100 shares). You would pay the premium of $450.00 for the option up front. Thereafter, you would have the right to sell XYZ stock for $50.00 per share (or $500.00) anytime before the contract expires, although you are not obligated to do so.

Sell To Close

This action closes the position created above (if executed before the contract's expiration date).

Calls -- When you "Sell to Close" a Call, you sell your option at the current premium price.Example: You own (1) option contract (+XYZFX) -- which is an XYZ July 50.00 Call. For this option, the Strike price is $50.00, and the premium at the time of purchase was $3.50 per contract (or $350.00 where one contract equals 100 shares). You sell the contract for the current premium price of $2.50 (or $250.00) . Since you bought the contact originally for $350.00, you would lose $100.00 in this transaction.

Puts -- When you "Sell to Close" a Put, you sell your option at the current premium price.Example: You own (1) option contract (+XYZRX) -- which is an XYZ July 50.00 Put. For this option, the Strike price is $50.00, and the premium at the time of purchase was $4.50 per contract (or $450.00 where one contract equals 100 shares). You sell the contract for the current premium price of $5.50 (or $550.00) . Since you bought the contact originally for $450.00, you would gain $100.00 in this transaction.

Sell To Open

This action opens a new position.

Calls -- When you "Sell to Open" a Call, you agree to sell a set amount of shares at the Strike Price (if the underlying option is exercised) in exchange for a premium paid up front. If you do not own these shares when you sell the contract, the option is considered a "Naked Call".Example: For stock XYZ, you sell one (1) option contract (+XYZFX) -- which is an XYZ July 50.00 Call. For this option, the Strike price is $50.00 and the premium is $3.50 per contract (or $350.00 where one contract equals 100 shares). You receive a premium of $350.00 for the option up front. Thereafter, you agree to sell 100 shares XYZ stock for $50.00 per share(or $500.00) anytime before your option contract expires, should the holder of the option exercise this right.

Puts -- When you "Sell to Open" a Put, you agree to buy a set amount of shares at the Strike Price (if the underlying option is exercised) in exchange for a premium paid up front.Example: For stock XYZ, you sell one (1) option contract (+XYZRX) -- which is an XYZ July 50.00 Put. For this option, the Strike price is $50.00 and the premium is $4.50 per contract (or $450.00 where one contract equals 100 shares). You receive a premium of $450.00 for the option up front. Thereafter, you agree to sell XYZ for $50.00 per share (or $500.00) anytime before your option contract expires, should the holder of the option exercise this right.

Buy To Close

This action closes the position created above (if executed before the contract's expiration date).

Calls -- When you "Buy to Close" a Call, you buy back the contract you previously sold at the current premium price. Example: You previously sold (1) option contract (+XYZFX) -- which is an XYZ July 50.00 Call. For this option, the Strike price is $50.00, and the premium you received at the time of purchase was $3.50 per contract (or $350.00 where one contract equals 100 shares). You buy back the contract you previously sold for the current premium price of $2.50 (or $250.00) . Since you sold the contact originally for $350.00, you would gain $100.00 in this transaction.

Puts -- When you "Buy to Close" a Put, you buy back the contract you previously sold at the current premium price. Example: You previously sold (1) option contract (+XYZRX) -- which is an XYZ July 50.00 Put. For this option, the Strike price is $50.00, and the premium you received at the time of purchase was $4.50 per contract (or $450.00 where one contract equals 100 shares). You buy back the contract you previously sold for the current premium price of $5.50 (or $550.00) . Since you bought the contact originally for $450.00, you would lose $100.00 in this transaction.