Options

When it comes to trading options on BBAE, it’s important to have a clear understanding of how they work and the key details involved. This FAQ provides essential information on trading options, covering important aspects such as option types, strategies, and considerations to help you navigate the options market with confidence.

What options trading levels are offered at BBAE?

At BBAE, we offer our clients a range of options trading levels to suit their experience and trading strategies. Here’s an overview of the options trading levels available and the strategies each level permits:

Options Strategies	Level 1	Level 2	Level 3	Level 4
Long Calls	×	√	√	√
Long Puts	×	√	√	√
Sell Covered Calls	√	√	√	√
Sell Cash Secured Puts (Requires Cash Account)	×	√	√	×
Short Covered Puts (Requires Margin)	×	√	√	√
Vertical Debit / Credit Spreads (Requires Margin)	×	×	√	√
Calendar / Diagonal Spreads (Requires Margin)	×	×	√	√
Naked Equity Puts (Requires Margin)	×	×	×	√

Level 1: This is our introductory level, designed for beginners. At this level, you are permitted to sell covered calls, which is a relatively conservative strategy where you own the underlying stock.

Level 2: Aimed at more experienced traders, Level 2 expands your trading capabilities. You can now buy options, such as long calls and long puts. Additionally, you can sell cash-secured puts if you have a cash account, and also engage in short covered puts with a margin account.

Level 3: For advanced traders, Level 3 allows the use of all strategies permitted in Level 2, and adds the ability to trade vertical debit/credit spreads as well as calendar and diagonal spreads, which require a margin account.

Level 4: The highest level, designed for expert traders with a high-risk tolerance, includes all the strategies from the previous levels. Level 4 traders can also trade naked equity puts, which involves a significant level of risk and also requires a margin account.

Please be aware that specific account types are required for certain strategies: selling cash-secured puts requires a cash account, while strategies marked with “Requires Margin” need a margin account. Each level has prerequisites that must be met, including your trading experience, investment objectives, and financial situation. We encourage our investors to fully understand the risks associated with each trading level and to trade responsibly.

For further information or if you have any specific questions about our options trading levels, please don’t hesitate to reach out to the BBAE support team.

What are options?

Options are derivative financial instruments that grant investors the right, but not the obligation, to buy or sell an underlying asset, such as a stock, at a predetermined price and within a specific time frame. There are two main types of options: call options, which represent the expectation that a stock’s price will increase, and put options, which signify the anticipation that a stock’s price will decrease. Options can serve various purposes, including hedging against potential losses, generating income, or speculating on market movements.

What are call options?

Call options grant the holder the right, but not the obligation, to purchase 100 shares of the underlying stock at a predetermined strike price. Investors who buy call options typically anticipate the stock’s value to increase, while those who sell call options expect the stock’s value to either decrease or remain unchanged. When purchasing a call option, you have the ability to sell the contract in the market if the stock price rises above the strike price. Conversely, when selling a call option, you receive the premium and are obligated to sell the underlying shares to the option buyer if the stock price climbs above the strike price.

What are put options?

Put options give the holder the right, but not the obligation, to sell 100 shares of the underlying stock at a predetermined strike price. Investors who buy put options generally expect the stock’s value to decrease, while those who sell put options anticipate the stock’s value to either increase or remain unchanged. When purchasing a put option, you can sell the contract in the market if the stock price falls below the strike price. On the other hand, when selling a put option, you collect the premium and are obligated to buy the underlying shares from the option buyer if the stock price drops below the strike price.

What options trading strategies are available?

BBAE offers access to a selection of options trading strategies for customers who satisfy the necessary suitability requirements. These strategies are designed for various risk tolerances and market perspectives:

You can access the following options trading strategies:

Buying a Call: If you believe the underlying stock’s price will increase, consider purchasing a call option.
Buying a Put: If you expect the underlying stock’s price to decrease, consider purchasing a put option.
Selling a Covered Call: By selling a call option while owning the underlying stock, you can generate extra income with the potential obligation to sell the stock if its price exceeds the strike price.
Selling a Covered Put: Sell a put option while shorting the underlying stock to potentially profit from the premium received if the stock’s price stays above the strike price.
Selling a Cash-Covered Put: Sell a put option while holding sufficient cash in your account to purchase the underlying stock, with the goal of profiting from the premium received or possibly acquiring the stock at a lower price.
Vertical Debit/Credit Spreads & Calendar/Diagonal Spreads: Utilize a combination of options with varying strike prices and/or expiration dates to manage risk and potentially profit from diverse market conditions.
Equity Naked Put: Sell a put option without owning the underlying stock, aiming to profit from the premium received, while bearing the potential obligation to buy the stock if its price drops below the strike price.

Please note that BBAE does not currently support index option trading.

What are Option packages?

Options trades are a flat fee of $0.99 per contract. However, for those seeking more frequent options trading, BBAE offers various option packages designed to lower the cost per contract. These packages are available for purchase in quantities ranging from 10 to 5,000 contracts, with a per-contract price as low as $0.4798.

Please note that all option packages remain valid for 90 days from the date of purchase. Contracts that go unused after this period will expire and are non-refundable. If you exhaust the number of contracts included in your package, additional packages can be purchased at any time. For further details, please refer to our commission and fee schedule available here.

What is the premium in options trading?

In the context of options trading, the premium is the price a buyer pays to the seller for the rights granted by the options contract. The premium serves as the per-share cost for holding the contract and can be thought of as the price to purchase the option. When buying or selling an option before expiration, the premium is the price at which it trades in the market, similar to how stocks are traded.

What factors influence the premium in options contracts?

The premium is not arbitrary; it is influenced by several factors related to the value of the contract and the underlying security. These factors include:

The underlying stock’s price
The volatility of the underlying stock
The time remaining until the contract’s expiration

Why is understanding the premium important in options trading?

By understanding the concept of the premium and the factors that influence its value, you can make more informed decisions when entering and exiting positions. The premium plays a crucial role in assessing the potential profitability of an options trade and should be considered carefully during the decision-making process. Being aware of the premium and its components can help you determine whether an options contract is fairly valued or overpriced, allowing you to make better-informed decisions on your trades and manage risks more effectively.

What is the expiration date in options trading?

In the context of options trading, the expiration date refers to the specific date when an options contract becomes invalid and can no longer be exercised. The expiration date plays a significant role in determining the contract’s value, as it sets the timeframe within which the contract owner can decide to buy, sell, or exercise the option.

How does the expiration date influence options contracts?

The expiration date is a key factor that influences various aspects of an options contract, such as its time value and premium. As the expiration date approaches, the time value of the option typically decreases, which can impact the contract’s overall value.

What happens when an options contract reaches its expiration date?

Once an options contract reaches its expiration date, it becomes worthless, and the rights granted by the contract are no longer valid. You need to be aware of the expiration dates for your contracts and plan your strategies accordingly to avoid holding positions that expire worthless.

Understanding the importance of the expiration date in options trading is crucial for managing positions and potential profits or losses. By being aware of the expiration dates for your contracts, you can make more informed decisions about when to enter and exit trades, adjust your strategies as needed, and avoid holding positions that are no longer valuable.

What is the strike price in options trading?

In the context of options trading, the strike price is the predetermined price at which an options contract can be exercised. It serves as a reference point for determining the contract’s profitability and whether it’s worth exercising.

How does the strike price affect call options?

For call options, a contract becomes profitable when the underlying stock’s price rises above the strike price plus the premium paid. If the stock’s price stays below the strike price, the contract expires worthless. When exercising a call option, the contract owner has the right to buy the underlying stock shares at the strike price.

How does the strike price affect put options?

For put options, a contract becomes profitable when the underlying stock’s price falls below the strike price minus the premium paid. If the stock’s price remains above the strike price, the contract expires worthless. When exercising a put option, the contract owner has the right to sell the underlying stock shares at the strike price.

Why is the strike price important in options trading?

The strike price is an essential element in options trading, as it helps you assess the potential profitability of your positions and decide whether to exercise, sell, or let your contracts expire. By understanding the relationship between the strike price, the underlying asset’s price, and the premium, you can make better-informed decisions about your options trades and develop strategies that align with your risk tolerance and investment objectives.

What is the Options Penny Interval Program?

The Options Penny Interval Program, also known as the Penny Pilot Program, allows options for certain stocks and indexes to trade in penny increments ($0.01).

The minimum increment for option series with a premium below $3 is $0.01.
The minimum increment for option series with a premium of $3 or more is $0.05.
However, for these three specific indexes—QQQ, IWM, and SPY—all option series can trade in $0.01 increments, regardless of the premium.

What is the difference between In-the-Money and Out-of-the-Money in options trading?

In-the-Money (ITM) and Out-of-the-Money (OTM) are terms used in options trading to describe the relationship between the underlying stock’s price and the option’s strike price. Understanding the difference between these terms is essential for making informed decisions in options trading.

What does In-the-Money (ITM) mean in options trading?

An option is considered in-the-money when exercising the option would result in a positive cash flow. For call options, this occurs when the underlying stock’s price is above the strike price. For put options, it happens when the underlying stock’s price is below the strike price. It’s important to note that being in-the-money doesn’t guarantee a profit upon exercising the option, as the option’s premium also factors into the overall profitability.

Example: If you buy a $10.00 Call option with a $2.00 premium, the option is in-the-money when the stock trades at $11.00. However, you wouldn’t break even until the stock price reaches $12.00 ($10.00 strike price + $2.00 premium).

What does Out-of-the-Money (OTM) mean in options trading?

An option is considered out-of-the-money when exercising the option would result in a negative cash flow. For call options, this occurs when the underlying stock’s price is below the strike price. For put options, it happens when the underlying stock’s price is above the strike price.

Example: If you buy a $10.00 Call option and the underlying stock’s price is at $9.00, the option is considered out-of-the-money. Similarly, if you buy a $10.00 Put option and the stock’s price is at $11.00, the option is also out-of-the-money.

In summary, understanding the concepts of In-the-Money and Out-of-the-Money is crucial for making informed decisions in options trading. Keep in mind that an option being in-the-money doesn’t necessarily mean you will make a profit if it’s exercised, as factors like the option’s premium also play a role in determining profitability.

How is the option notional value calculated?

Option notional value is calculated by multiplying the strike price of the option by the number of option contracts in the trade order and the number of shares per contract.

For example, if the strike price is $50, and you have 10 option contracts with a standard shares per contract of 100, the calculation would be:

Option Notional Value = $50 * 10 * 100 = $50,000 This represents the notional value of the underlying shares that the option contracts control

What should I know about buying and selling options?

When trading options, it’s crucial to understand the various actions and their potential outcomes to make more informed decisions. Here’s a simplified breakdown:

Buying to open: You purchase an options contract, becoming the owner. As the owner, you can:
- Sell the contract back into the market
- Exercise the contract
- Allow the contract to expire
Selling to close: You sell a contract you own back into the market, closing the existing position.
Selling to open: You sell a contract to a buyer, collecting a premium. As the contract seller, you have:
- The right, but not the obligation, to fulfill the contract if assigned
- The option to buy the contract back in the market
Buying to close: You buy back a contract you initially sold, eliminating the possibility of being assigned on that contract.

By familiarizing yourself with these terms and concepts, you can better navigate the options trading landscape.

Why should I consider buying a call option?

Investing in call options can be an attractive strategy because:

Leverage: Call options allow you to control a larger amount of the underlying stock with a smaller upfront investment. This leverage can lead to higher returns compared to investing directly in the stock.
Limited risk: The maximum loss is limited to the premium paid for the call option, regardless of how much the underlying stock’s price might decrease.
Flexibility: Call options provide the flexibility to profit from a bullish market outlook without the obligation to buy the underlying stock.

How can I profit from call options?

After purchasing a call option, its value will generally follow the underlying stock’s value. To profit from a call option, you can:

Sell the option itself for a profit or loss before expiration, or
Exercise the option at expiration and buy 100 shares of the stock at the stated strike price per share, potentially selling the shares at a higher market price.

What risks do call options pose?

There are inherent risks associated with call options:

Potential loss: If the stock’s value doesn’t increase enough before the expiration date, the call option may expire worthless, resulting in the loss of the premium paid.
Time decay: As the expiration date approaches, the time value of the option decreases, which can negatively impact the option’s value.

How can I evaluate the risk level of call options?

Risk levels for call options depend on several factors:

Expiration date: Longer expiration dates generally entail less risk, as there is more time for the stock to appreciate in value.
Strike price: Higher strike prices usually pose greater risks for call options, as the stock must experience a more substantial increase in value to become profitable.
Implied volatility: Higher implied volatility indicates greater uncertainty about the stock’s price movement, which can affect the option’s value and the potential returns.

What are the key aspects to consider when buying call options?

Buying a call option is similar to purchasing a stock, with the expectation that the stock’s price will increase, thereby making the option more valuable and providing an opportunity to profit.

How can I evaluate the risk level of call options?

Risk levels for call options depend on several factors:

Expiration date: Longer expiration dates generally entail less risk, as there is more time for the stock to appreciate in value.
Strike price: Higher strike prices usually pose greater risks for call options, as the stock must experience a more substantial increase in value to become profitable.
Implied volatility: Higher implied volatility indicates greater uncertainty about the stock’s price movement, which can affect the option’s value and the potential returns.

Why should I consider buying a put option?

Investing in put options can be an attractive strategy because:

Bearish outlook: Put options allow you to profit from a declining stock price without the need to short the stock directly. This can be an effective way to hedge existing long positions or speculate on downward price movements.
Leverage: Put options enable you to control a larger amount of the underlying stock with a smaller upfront investment. This leverage can lead to higher returns compared to shorting the stock directly.
Limited risk: The maximum loss is limited to the premium paid for the put option, regardless of how much the underlying stock’s price might increase.

How can I profit from put options?

After purchasing a put option, its value will generally follow the underlying stock’s value. To profit from a put option, you can:

Sell the option itself for a profit or loss before expiration.
Exercise the option at expiration and sell 100 shares of the stock at the stated strike price per share, potentially buying the shares at a lower market price to cover your short position.

What risks do put options pose?

There are inherent risks associated with put options:

Potential loss: If the stock’s value doesn’t decrease enough before the expiration date, the put option may expire worthless, resulting in the loss of the premium paid.
Time decay: As the expiration date approaches, the time value of the option decreases, which can negatively impact the option’s value.

What are the key aspects to consider when buying put options?

Buying a put option is similar to shorting a stock, as you expect the stock’s price to decrease, thereby making your option more valuable and providing an opportunity to profit.

How can I evaluate the risk level of put options?

Risk levels for put options depend on several factors:

Expiration date: Longer expiration dates generally entail less risk, as there is more time for the stock to depreciate in value.
Strike price: Lower strike prices usually pose greater risks for put options, as the stock must experience a more substantial decrease in value to become profitable.
Implied volatility: Higher implied volatility indicates greater uncertainty about the stock’s price movement, which can affect the option’s value and the potential returns.

What are the key aspects to consider when selling covered calls?

Selling a covered call involves holding the underlying stock and selling someone else the right to buy your stock at a specific price (the strike price) by a specific date (the expiration date).

Why should I consider selling a covered call?

Selling covered calls can be an attractive strategy for investors because:

Income generation: Covered calls allow you to generate income from your stock holdings through the premiums collected when selling the call options.
Downside protection: The premium received when selling the call option provides a buffer against potential stock price declines and can result in additional profit if the stock’s price remains flat or moderately increases.
Portfolio management: Selling covered calls can help manage risk and improve overall portfolio performance by providing consistent income and reducing the impact of market volatility on your holdings.

How can I profit from selling covered calls?

You make money from selling a covered call by collecting the premium when you sell the call option. The potential outcomes at the option’s expiration are:

If the stock’s price remains below the strike price, you keep the premium and retain ownership of the shares.
If the stock’s price rises above the strike price, you may need to sell your shares to the option buyer at the strike price, potentially missing out on additional gains.

What risks do covered calls pose?

There are inherent risks associated with selling covered calls:

Opportunity cost: The primary risk of selling covered calls is the potential for missing out on substantial gains if the stock price increases significantly beyond the strike price.
Partial protection: While the premium received provides some downside protection, you still bear the risk of holding the underlying stock, which could experience price declines.

How can I evaluate the risk level of covered calls?

Risk levels for covered calls depend on several factors:

Strike price: Higher strike prices are considered less risky because the stock price needs to rise more before the option is in-the-money, allowing you to potentially capture more upside.
Expiration date: Options with longer expiration dates typically have higher premiums, providing a larger buffer against potential stock price declines and more income potential.
Overall market conditions: The risk level of covered calls can also be influenced by broader market conditions, such as market volatility and the performance of the underlying stock’s sector.

What are the key aspects to consider when selling covered puts?

Selling a covered put involves having a short position in the underlying stock and selling someone else the right to sell the stock to you at a specific price (the strike price) by a specific date (the expiration date).

Why should I consider selling a covered put?

Selling covered puts can be an attractive strategy for investors because:

Income generation: Covered puts allow you to generate income through the premiums collected when selling the put options.
Potential stock acquisition: Selling covered puts can help you acquire the underlying stock at a lower price if the option is exercised and the stock’s price falls below the strike price.
Partial protection: The premium received when selling the put option provides a buffer against potential stock price increases and can result in additional profit if the stock’s price remains flat or moderately decreases.

How can I profit from selling covered puts?

You make money from selling a covered put by collecting the premium when you sell the put option. The potential outcomes at the option’s expiration are:

If the stock’s price remains above the strike price, you keep the premium and maintain your short position in the stock.
If the stock’s price falls below the strike price, you may need to buy the shares from the option buyer at the strike price, which could result in a loss if the stock’s price has fallen significantly.

What risks do covered puts pose?

There are inherent risks associated with selling covered puts:

Opportunity cost: The primary risk of selling covered puts is the potential for missing out on substantial gains if the stock price decreases significantly beyond the strike price.
Partial protection: While the premium received provides some protection, you still bear the risk of holding the short position in the underlying stock, which could experience price increases.

How can I evaluate the risk level of covered puts?

Risk levels for covered puts depend on several factors:

Strike price: Lower strike prices are considered less risky because the stock price needs to fall more before the option is in-the-money, potentially limiting your losses.
Expiration date: Options with longer expiration dates typically have higher premiums, providing a larger buffer against potential stock price increases and more income potential.
Overall market conditions: The risk level of covered puts can also be influenced by broader market conditions, such as market volatility and the performance of the underlying stock’s sector.

What are the key aspects to consider when selling cash-covered puts?

Selling a cash-covered put involves having enough cash in your account to buy the underlying stock if the option is exercised. You’re selling someone else the right to sell the stock to you at a specific price (the strike price) by a specific date (the expiration date).

Why should I consider selling a cash-covered put?

Selling cash-covered puts can be an attractive strategy for investors because:

Income generation: Cash-covered puts allow you to generate income through the premiums collected when selling the put options.
Potential stock acquisition: Selling cash-covered puts can help you acquire the underlying stock at a lower price if the option is exercised and the stock’s price falls below the strike price.
Partial protection: The premium received when selling the put option provides a buffer against potential stock price increases and can result in additional profit if the stock’s price remains flat or moderately decreases.

How can I profit from selling cash-covered puts?

You make money from selling a cash-covered put by collecting the premium when you sell the put option. The potential outcomes at the option’s expiration are:

If the stock’s price remains above the strike price, you keep the premium.
If the stock’s price falls below the strike price, you may need to buy the shares from the option buyer at the strike price, which could result in a loss if the stock’s price has fallen significantly.

What risks do cash-covered puts pose?

There are inherent risks associated with selling cash-covered puts:

Opportunity cost: The primary risk of selling cash-covered puts is the potential for missing out on substantial gains if the stock price decreases significantly beyond the strike price.
Limited gains: If the stock price rises, your gains are limited to the premium received.

How can I evaluate the risk level of cash-covered puts?

Risk levels for cash-covered puts depend on several factors:

Strike price: Lower strike prices are considered less risky because the stock price needs to fall more before the option is in-the-money, potentially limiting your losses.
Expiration date: Options with longer expiration dates typically have higher premiums, providing a larger buffer against potential stock price increases and more income potential. However, the longer the expiration date, the longer you may have to wait to realize the potential profits from the premium received.
Overall market conditions: The risk level of cash-covered puts can also be influenced by broader market conditions, such as market volatility and the performance of the underlying stock’s sector.

What do exercise and assignment mean in options trading?

In the context of options trading, “exercise” and “assignment” are two essential concepts that define the rights and obligations of contract owners and sellers.

What does exercising an options contract entail?

Exercising an options contract refers to the action taken by the owner of the contract to execute the terms of the contract. As the owner of an options contract, you have the following choices:

Exercise the contract if it’s “in the money” (profitable)
Let the contract expire worthless if it’s not profitable
Sell the contract back into the market before expiration to realize gains or minimize losses

What does assignment in options trading involve?

Assignment in options trading is the process where the seller of an options contract is required to fulfill the terms of the contract when the owner exercises it. As the seller of the contract, you initially collected the premium, and you must meet the obligations outlined in the contract if you are assigned.

What rights and obligations do options contract owners and sellers have?

The owner of an options contract has the right to decide whether to exercise the contract or not. In contrast, the seller of the contract has an obligation to fulfill the contract’s terms if they are assigned. When the contract owner exercises the option, the seller is assigned and must meet their contractual obligations.

What happens if my account doesn’t have sufficient buying power or an adequate corresponding equity position?

If your account does not have the necessary buying power or a matching equity position, your early exercise request may be rejected. If you have any questions or concerns, please contact customer support at +1-800-950-5266 or bbae@rbsecurities.com.

Whose responsibility is it to monitor the account and manage options activity?

You are responsible for monitoring your account and managing options activity, and you are responsible for any losses incurred from options trading (including any actions taken by Redbridge). Options trading entails significant risk and is not suitable for all investors.

In summary, understanding what happens on the options expiration date is critical for managing your options positions. Monitor your account closely and take appropriate action when necessary. Be aware of the risks involved in options trading and the potential actions that Redbridge may take if you fail to act on your ITM options.

Can I exercise my options before expiration?

Understanding the process of exercising options before expiration is crucial for managing your options positions. In this FAQ, we’ll discuss whether you can exercise options before expiration and how to request an early exercise.

How do I request early exercise?

To request an early exercise of your options, follow these steps:

Access the Position Details section.
Locate the specific option you wish to exercise early.
Locate “Early Exercise” and click on “Click to Apply”.

Can I cancel my early exercise request?

Yes, you can cancel your early exercise request at any time before the market close. Your early exercise request will be processed after the market closes unless a cancellation notice is received before the market close.

Are there any fees associated with early exercise requests?

Yes, there is a $6.99 fee for processing early exercise requests.

How long does it take to process an early exercise?

It typically takes 1-2 business days to process an early exercise.

In summary, understanding the process of exercising options before expiration and requesting early exercise is essential for managing your options positions. Keep in mind that fees and account requirements may apply when exercising options early. If you have any questions, don’t hesitate to contact customer support.

How do I exercise an option position?

Understanding how to exercise an option position and the consequences of not having sufficient funds or equities at the time of exercise is crucial for managing your options positions. In this FAQ, we’ll discuss the process of exercising an option position and what happens if you don’t have the necessary funds or equities in your account.

What if I want to exercise my option before the expiration date?

You can request an early exercise through your account or by contacting customer support. Follow the specific guidelines provided by BBAE in the [early exercise FAQ](#can-i-exercise-my-options-before-expiration) to ensure a smooth early exercise process.

What happens if I don’t have sufficient funds or equities to complete the exercise?

If you don’t have the necessary funds or equities in your account to complete the exercise, Redbridge will be required to issue a “Do Not Exercise” notice to the Options Clearing Corporation (OCC), and your option will expire worthless. This means that you won’t benefit from the in-the-money option, and any potential profits will be lost.

How can I avoid the risk of having insufficient funds or equities for the exercise?

To avoid the risk of not having enough funds or equities to complete the exercise, you can liquidate your option position in the open market before the expiration date. This process, known as “selling to close” your long option position, allows you to realize any potential profits without the need to exercise the option and fulfill the associated obligations.

In summary, understanding the process of exercising an option position and the consequences of not having sufficient funds or equities is essential for managing your options positions. Keep a close eye on your account balance and equity holdings to ensure you have the necessary resources to exercise options when needed. If you have any concerns, consider liquidating your option position in the open market before the expiration date to avoid potential issues.

What will happen on the options expiration date?

As the expiration date of your option contract approaches, it’s essential to understand the various scenarios that can occur and the actions you may need to take. In this FAQ, we’ll discuss what happens on the options expiration date for both in-the-money (ITM) and out-of-the-money (OTM) options.

What happens if my option is in-the-money (ITM) by $0.01 or more at market close?

If your option is ITM by $0.01 or more at market close on the expiration date, the following may occur:

Automatic exercise: If there is sufficient buying power in your account, the Options Clearing Corporation (OCC) will automatically exercise the option after the market close on the expiration date.
Sell the ITM option: If there is not enough buying power in your account to support the exercise, you can sell the ITM option to collect the premium.

What if I don’t take any action on my ITM option?

Redbridge reserves the right to take necessary actions if you do not take action within 35 minutes before the market closes on the contract expiration date. These actions may include:

Closing the contracts in the open market on your behalf.
Submitting a “Do Not Exercise” request.
Preventing the exercise of contracts that your account cannot support.

Please note that any action taken by Redbridge will be on a best-efforts basis, and no action is guaranteed. Market or limit orders may be placed, resulting in orders being filled at less favorable pricing or not executing at all.

What happens if my option contract is out-of-the-money (OTM) at market close?

If your option contract is OTM at market close on the expiration date, it will automatically expire worthless, and no action is required from you.

What is the break-even point in options trading?

In the context of options trading, the break-even point refers to the price level at which the owner of an options contract would neither gain nor lose money if they were to exercise the contract. Calculating the break-even point is crucial for assessing the potential profitability of an options position and making informed decisions about when to exercise, sell, or hold the contract.

How do you calculate the break-even point for call options?

For call options, the break-even point is determined by adding the premium paid to the strike price:

Break-Even Point (Call) = Strike Price + Premium Paid

How do you calculate the break-even point for put options?

For put options, the break-even point is calculated by subtracting the premium paid from the strike price:

Break-Even Point (Put) = Strike Price – Premium Paid

By understanding the break-even point, you can better assess the potential profitability of your positions and make informed decisions about when to exercise, sell, or hold your contracts. Knowing the break-even point can also help you set appropriate profit targets and stop-loss levels, which are essential for effective risk management in options trading.

What is time value in options trading?

In the context of options trading, time value is a component of an option’s premium that represents the value attributed to the remaining time until the contract’s expiration. The time value of an option is influenced by the potential for price movement during the contract’s lifespan.

How does time value change as an option approaches expiration?

As an option gets closer to its expiration date, the time value typically decreases. This is because there is less time for the underlying asset’s price to change, reducing the likelihood of the option becoming profitable (or more profitable). Conversely, options with longer time until expiration usually have higher time values, as there is more potential for price movement during the extended period.

Why is time value important in options trading?

Time value is an essential factor to consider when trading options, as it can impact the price at which a contract trades and the potential returns on investment. You should be aware of how time value changes as the expiration date approaches to make well-informed decisions about your positions. By understanding the relationship between time value and expiration, you can better assess the potential profitability of your positions and develop strategies that align with your risk tolerance and investment objectives.

What is intrinsic value in options trading?

Intrinsic value refers to the difference between the market price of an underlying asset and the strike price of an option. It signifies how much money you would make if you exercised the option and sold the underlying asset immediately in the market.

Here’s how it works:

For a call option (which gives you the right to buy), the intrinsic value is calculated as: (Market Price of Underlying Asset – Strike Price). However, if the strike price is higher than the market price, the intrinsic value is considered zero, not negative. In other words, it’s the amount by which your call option is ‘in the money.’
For a put option (which gives you the right to sell), the intrinsic value is calculated as: (Strike Price – Market Price of Underlying Asset). Again, if the market price is higher than the strike price, the intrinsic value is considered zero, not negative. Essentially, it’s the amount by which your put option is ‘in the money.’

Note that intrinsic value does not consider the time remaining before an option’s expiration (known as “time value”). An option’s total premium is the sum of its intrinsic value and its time value. If an option has no intrinsic value (i.e., it’s ‘out of the money’), its premium is made up entirely of time value.

What is the theoretical value in options trading?

The theoretical value of an option refers to the estimated fair price for an option, calculated using mathematical models, such as the Black-Scholes model. This calculation takes into account various factors, including the current price of the underlying asset, the strike price of the option, the time until expiration, the volatility of the underlying asset, and the risk-free interest rate.

In options trading, there is often a substantial spread between the bid and ask prices, making it difficult for investors to determine the reasonable price for the options they hold. This is where BBAE’s theoretical options pricing feature comes in handy. By calculating the theoretical price through various mathematical models, BBAE measures the value of the option under specific market conditions, helping investors gain clarity about the potential fair price of an option.

The theoretical value provides a benchmark that can help traders determine whether an option is underpriced (trading at a price lower than its theoretical value) or overpriced (trading at a price higher than its theoretical value).

It’s important to remember that while these models can provide valuable insights, they are based on assumptions and do not guarantee accurate predictions. The actual market price of an option can differ from its theoretical value due to factors such as market supply and demand or changes in market conditions.

In conclusion, while the theoretical value is a useful tool for option pricing analysis and decision-making, it should be used in conjunction with other market information and analysis methods.

What collateral is required for selling to open an option contract?

When selling options to open a position, collateral is required to ensure that you can cover the position in case of assignment. Different options strategies require different types of collateral. In this FAQ, we’ll discuss the collateral requirements for various options strategies.

Options strategies collateralized by stock positions in your account

Selling to Open a Covered Call: You’ll need to have 100 shares of the underlying stock per contract in your long positions to cover the risk of assignment. While the covered call position is open, you won’t be able to sell 100 shares of the underlying stock.
Selling to Open a Covered Put: You’ll need to have 100 shares of the underlying stock per contract in your short positions to cover the risk of assignment. While the covered put position is open, you won’t be able to buy to cover 100 shares of the underlying stock.

Options strategies collateralized by cash in your account

Selling to Open a Cash-Covered Put: Redbridge will set aside enough cash in your account as collateral to be able to buy the underlying stock at the contract’s strike price.

Pending Orders and Collateral

When you place an options order, Redbridge will hold the appropriate collateral (cash or stock) from the time the order is submitted and becomes pending. Similar to holding enough cash to fill your pending order when you open an equity position, Redbridge will hold enough cash or stock to cover your option position until the order is canceled.

In summary, understanding the collateral requirements for selling to open an option contract is essential for managing your options positions. Different options strategies have different collateral requirements, which can be either stock positions or cash in your account. Be sure to maintain the necessary collateral to cover your options positions and ensure smooth trading.

What are the benefits of buying back the option in the open market?

Closing your short option position by buying it back in the open market can be beneficial in certain scenarios, such as:

Locking in profits: If the option’s premium has decreased since you sold it, buying it back at a lower price allows you to lock in the difference as profit.
Reducing risk: If the underlying security’s price moves unfavorably, making the option more likely to be exercised, you can buy back the option to eliminate the risk of assignment.
Preventing assignment: If you want to avoid the potential obligation of delivering shares (for call options) or buying shares (for put options), you can close your short option position before the option is exercised.

How do I buy back the option in the open market?

To close your short option position, place an order to buy the option with the same terms as the one you sold. Keep in mind that the option’s premium may have changed, and you may need to pay more or less than what you received when you initially sold the option.

In summary, understanding the assignment process and the ability to buy options back in the open market is essential for managing your options positions. Monitoring your account regularly and taking appropriate action when needed can help you reduce risk and lock in profits.

How do corporate actions affect options positions?

Corporate actions can have a significant impact on options positions, as they often result in changes to the underlying stock. It’s essential to monitor OCC (Options Clearing Corporation) Memos for any updates that may affect your options positions. While the following rules generally apply, always refer to the OCC official website for final confirmation.

Understanding the various types of corporate actions and their potential effects on options positions is crucial for managing your contracts and maintaining their value. Corporate actions can include symbol changes, reverse stock splits, forward stock splits, and special dividends.

Symbol changes occur when a security changes its symbol, which results in a corresponding change to the options contract. For example, if security A changes its symbol to B, the options contract A 20991231 Call 10 will become B 20991231 Call 10.
Reverse stock splits cause options contracts to be adjusted accordingly. If symbol A undergoes a 1:10 reverse split, the options contract A 20991231 Call 10 will change to A1 20991231 Call 10.
Forward stock splits result in changes to options contracts based on the split ratio. Options contracts can be altered in various ways, depending on whether the split results in a round number or not.
Special dividends are non-recurring dividends that typically result in a significant distribution. In this case, the distribution amount will be subtracted from the strike price.

In summary, corporate actions can affect options positions in various ways, and it is crucial to stay informed of any changes and refer to the OCC for confirmation when managing options positions affected by corporate actions. By staying informed and adjusting your positions as needed, you can mitigate the potential risks associated with corporate actions and maintain the value of your options contracts.

How does giving up exercise rights affect options positions?

Giving up exercise rights for an options contract can impact your options positions and potential profits. At BBAE, there are two options if you want to give up the exercise rights of an in-the-money options contract:

Sell the option on the open market: If you choose to sell the option on the open market, you can keep the gain from the transaction. This allows you to realize any profits without exercising the option.
Submit an email request: You can give up your exercise rights by sending an email to bbae@rbsecurities.com at least three hours prior to the market close. Be sure to follow the format provided below and send the email from your registered account:

Subject: 7XJ00000 – Give-up Options Exercise – 3 contracts of ABC290122C300

Message Body: My account number is 7XJ00000. I want to give up my exercise rights on ABC290122C300 for 3 option contracts. I acknowledge the risk of forgoing my exercise rights and that the option contract(s) will expire worthless.

By giving up your exercise rights, you are forgoing the opportunity to buy (for call options) or sell (for put options) the underlying stock at the predetermined strike price. This means that you will not be able to capitalize on any favorable price movements of the underlying stock. Additionally, if you give up your exercise rights, your in-the-money options contract(s) will expire worthless.

In summary, giving up exercise rights can impact your options positions and potential profits. Be sure to carefully consider these risks before requesting to give up your exercise rights. This decision can have significant consequences on your investment strategy, so it’s essential to weigh the potential benefits and drawbacks before taking any action.

What will happen to my spread option positions on the options expiration date?

Calendar Option Spreads (Horizontal Option Spreads)

If your Short Leg is in-the-money (ITM) at the market close, you may be assigned and required to buy or sell the underlying shares. This could result in a margin call, which you will need to cover by exercising the Long Leg, liquidating or buying to cover the assigned shares, or depositing funds. Redbridge may take actions to mitigate risk without notice, such as closing your short position before the market close or closing your margin call.

To avoid potential Short Leg assignments, close the Short Leg option before the market close. Remember that short option contracts may be assigned at any time, and you might be assigned on an out-of-the-money (OTM) short option contract.

Vertical Option Spreads

If your Short Leg is ITM at the market close, you may be assigned and required to buy or sell the underlying shares. We recommend closing the position when the Long Leg is OTM. If you don’t take any action within 35 minutes before the market closes on the contract expiration date, Redbridge reserves the right to take necessary actions to mitigate risk without notice.

If the Long Leg is ITM and your Short Leg is OTM at the market close, the Long Leg will be auto-exercised if ITM by $0.01 or more. Redbridge may submit Do Not Exercise instructions on your behalf if there’s insufficient Buying Power. To avoid a potential short assignment outcome, close the short option or the spread prior to the market close.

Please note that short option contracts may be assigned at any time (not just after the option expires), and you might be assigned on an OTM short option contract.

You are responsible for monitoring your account and any losses incurred from options activity, including actions taken by Redbridge. Options trading entails significant risk and is not appropriate for all investors. Be sure to understand the risks involved and carefully consider your investment objectives before trading options.

Why is the total Available to Exercise less than my total position?

The total Available to Exercise may be less than your total position for several reasons, including:

Insufficient buying power: If you lack the necessary buying power to exercise your options position, the total Available to Exercise will be reduced accordingly. Buying power is determined by the funds in your account, as well as any margin available to you.
Inadequate corresponding equity position: When you want to exercise a put option, you need to have an adequate number of shares of the underlying stock in your account. If you don’t hold enough shares, the total Available to Exercise will be less than your total position.
Pending option orders: If you have any pending option orders, they will reduce the total Available to Exercise. This is because the pending orders tie up buying power or shares required to exercise the remaining options.

To resolve this issue, you can take the following actions:

Cancel any pending orders that are affecting your Available to Exercise.
Deposit additional funds or liquidate other positions to increase your buying power.
Acquire the necessary corresponding equity position if you want to exercise a put option.

After addressing these factors, you can re-apply for Early Exercise with an updated Available to Exercise amount that matches your total position. By doing so, you can ensure that you have the appropriate resources to manage your options positions effectively and maximize your investment potential.

What does it mean when my option position is assigned?

Understanding the assignment process is crucial for managing your options positions. When your option position is assigned, it means that the buyer of the option you sold (either a call or a put) has exercised their right to buy or sell the underlying security at the option’s strike price. As the seller (writer) of the option, you are obligated to fulfill the terms of the contract.

What happens when a call option I sold is assigned?

If you sold a call option and it gets assigned, you are obligated to deliver the specified number of shares of the underlying security to the buyer at the agreed-upon strike price. If you already own the shares in your account, this is known as a “covered call” assignment, and the shares will be removed from your account in exchange for the agreed-upon payment. If you don’t own the shares, you’ll need to buy them in the open market at the current market price to fulfill your obligation, which may result in a loss if the market price is higher than the strike price.

What happens when a put option I sold is assigned?

If you sold a put option and it gets assigned, you are obligated to buy the specified number of shares of the underlying security from the buyer at the agreed-upon strike price. The cash required to purchase the shares will be debited from your account, and the shares will be added to your account. This may result in a loss if the strike price is higher than the current market price of the shares.

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Options

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What options trading levels are offered at BBAE?

What are options?

What are call options?

What are put options?

What options trading strategies are available?

What are Option packages?

What is the premium in options trading?

What factors influence the premium in options contracts?

Why is understanding the premium important in options trading?

What is the expiration date in options trading?

How does the expiration date influence options contracts?

What happens when an options contract reaches its expiration date?

What is the strike price in options trading?

How does the strike price affect call options?

How does the strike price affect put options?

Why is the strike price important in options trading?

What is the Options Penny Interval Program?

What is the difference between In-the-Money and Out-of-the-Money in options trading?

What does In-the-Money (ITM) mean in options trading?

What does Out-of-the-Money (OTM) mean in options trading?

How is the option notional value calculated?

What should I know about buying and selling options?

Why should I consider buying a call option?

How can I profit from call options?

What risks do call options pose?

How can I evaluate the risk level of call options?

What are the key aspects to consider when buying call options?

How can I evaluate the risk level of call options?

Why should I consider buying a put option?

How can I profit from put options?

What risks do put options pose?

What are the key aspects to consider when buying put options?

How can I evaluate the risk level of put options?

What are the key aspects to consider when selling covered calls?

Why should I consider selling a covered call?

How can I profit from selling covered calls?

What risks do covered calls pose?

How can I evaluate the risk level of covered calls?

What are the key aspects to consider when selling covered puts?

Why should I consider selling a covered put?

How can I profit from selling covered puts?

What risks do covered puts pose?

How can I evaluate the risk level of covered puts?

What are the key aspects to consider when selling cash-covered puts?

Why should I consider selling a cash-covered put?

How can I profit from selling cash-covered puts?

What risks do cash-covered puts pose?

How can I evaluate the risk level of cash-covered puts?

What do exercise and assignment mean in options trading?

What does exercising an options contract entail?

What does assignment in options trading involve?

What rights and obligations do options contract owners and sellers have?

What happens if my account doesn’t have sufficient buying power or an adequate corresponding equity position?

Whose responsibility is it to monitor the account and manage options activity?

Can I exercise my options before expiration?

How do I request early exercise?

Can I cancel my early exercise request?

Are there any fees associated with early exercise requests?

How long does it take to process an early exercise?

How do I exercise an option position?

What if I want to exercise my option before the expiration date?

What happens if I don’t have sufficient funds or equities to complete the exercise?

How can I avoid the risk of having insufficient funds or equities for the exercise?

What will happen on the options expiration date?

What happens if my option is in-the-money (ITM) by $0.01 or more at market close?

What if I don’t take any action on my ITM option?

What happens if my option contract is out-of-the-money (OTM) at market close?

What is the break-even point in options trading?

How do you calculate the break-even point for call options?

How do you calculate the break-even point for put options?

What is time value in options trading?

How does time value change as an option approaches expiration?

Why is time value important in options trading?

What is intrinsic value in options trading?

What is the theoretical value in options trading?

What collateral is required for selling to open an option contract?

What are the benefits of buying back the option in the open market?

How do I buy back the option in the open market?