Frequently Asked Questions
Stock Options
What are the risks involved in trading options?
The risks from buying Options (if you decide not to sell them before expiration) are that they will expire worthless, assuming they are out-of-the-money. On expiry, if the Option is ITM by 0.01 or more, it will be auto-exercised by the OCC. Post auto-exercise, the underlying stock price may have drastic price movement(s) during the extended hours trading hours, which in normal circumstances warrant the position to be OTM. As such, for positions that are delivered/taken, delivery may experience a loss instead (even if the auto-exercise was ITM).
Aside from buying Options, many investors get excited about selling Options because they get paid upfront for their trades.
Investors that sell short puts and covered calls are taking on specific risks. In the case of a cash secured put write, you risk being put stock, which we have mentioned above. Let’s look at the Microsoft (MSFT) 21 December 2022 US$110 Put Write, which expired in-the-money, again.
If we sold one contract, we would be required to purchase 100 shares for US$110 per share at expiration, costing US$11,000. Every put write carries the risk of exercise. However, this is unlikely to happen, hence selling too many options that expire in the money can be costly.
In the case of a covered call strategy, the risk lies with the possibility of the buyer calling your stock away.
Assuming you bought 100 shares of Microsoft for US$110 per share, your invested capital is US$11,000. You decided to engage in a covered call strategy. If your covered call expires in-the-money, you would have been required to sell your 100 shares for US$100. The buyer would have paid US$10,000, resulting in loss in money on our trade although the premium from the selling of the call option will still belong to you.
When selling covered calls, you risk losing money from your stock position at times.
Other faq that might help you
- How are options classified?
- How do I make sense of an option symbol?
- What are the moneyness of options?
- What are the Greeks in option trading?
- What happens after I’ve entered into an options position?
- Are there any forms required prior to trading Options?
- What are the eligible account types to trade Options?
- How long is the approval process for Option Activation?
- How do I read the Option Portfolio balance?
- Why are Exercise/Assignment activities not shown on the same day of the e-statements?
- What are some of the common reasons for order rejection?
- How do I transfer funds into my Options Account? (Video Guide)
- How do I transfer funds into my Options Account?
- How do I transfer stocks into my Options Account? (Video Guide)
- How do I transfer stocks into my Options Account?
- Why is there a need to transfer funds/stocks prior to trading options?
- Does POEMS support option strategies?
- What are the supported platforms?
- Is there US Pre-market Trading for options?
- What are the tradable counters available for options?
- What happens if the underlying share is delisted onto OTC?
- Glossary
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