Options involve risk and are not suitable for all investors. [+] Show details and the options disclosure document.
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.
The maximum loss, gain and breakeven of any options strategy only remains as defined so long as the strategy contains all original positions. Trading, rolling, assignment, or exercise of any portion of the strategy will result in a new maximum loss, gain and breakeven calculation, which will be materially different from the calculation when the strategy remains intact with all of the contemplated legs or positions. This is applicable to all options strategies inclusive of long options, short options and spreads. To learn more about Merrill's uncovered option handling practices, view
Naked Option Stress Analysis (NOSA) (PDF).
Early assignment risk is always present for option writers (specific to American-style options only). Early assignment risk may be amplified in the event a call writer is short an option during the period the underlying security has an ex-dividend date. This is referred to as dividend risk.
Long options are exercised and short options are assigned. Note that American-style options can be assigned/exercised at any time through the day of expiration without prior notice. Options can be assigned/exercised after market close on expiration day. View specific
Merrill Option Exercise & Assignment Practices (PDF).
Supporting documentation for any claims, comparison, recommendations, statistics, or other technical data, will be supplied upon request.
Introduction
When considering any options strategy, you may want to think about Long-Term Equity AnticiPation Securities® (LEAPS®) if you are prepared to carry the position for a longer term. While using LEAPS® does not ensure success, having a longer amount of time for your position to work is an attractive feature for many investors. In addition, several other factors make LEAPS® useful.
Call LEAPS®: Stock Alternative
LEAPS® offer investors an alternative to stock ownership. LEAPS® calls enable investors to benefit from stock price rises while risking less capital than required to purchase stock. If a stock price rises to a level above the exercise price of the LEAPS®, the buyer may exercise the option and purchase shares at a price below the current market price. The same investor may sell the LEAPS® calls in the open market for a profit.
Put LEAPS®: Hedge
LEAPS® puts provide investors with a means to hedge current stock holdings. Investors should consider purchasing LEAPS® puts if they are concerned with potential price drops on stock that they own. A purchase of a LEAPS® put gives the buyer the right to sell the underlying stock at the strike price up to the option's expiration.
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A short call option in which the seller (writer) does not own the shares of underlying stock represented by his or her options contracts or an offsetting long call options contract. If assigned, the seller is obligated to deliver the underlying security at the strike price. As the writer does not own the underlying security, the writer may have to purchase the underlying security at any price in order to meet the obligation. This represents unlimited risk as the underlying security has unlimited upward potential.
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A short put option in which the seller (writer) does not own the cash equivalent of the exercisable value represented by his or her options contracts or an offsetting long put options contract. If assigned the seller is obligated to purchase the underlying security at the strike price. As the underlying security can go as low as zero, the writer faces substantial loss potential.
What's the Downside?
Stock vs. LEAPS®
There are many differences between an investment in common stock and an investment in options. Unlike common stock, an option has a limited life. An investor can hold common stock indefinitely, while every option has an expiration date. If an investor does not close out or exercise an option prior to expiration, it ceases to exist as a financial instrument. As a result, even if an option investor correctly picks the direction the underlying stock will move, unless the investor also correctly selects the period that movement will take place, the investor may not profit.
Stock vs. LEAPS®
There are many differences between an investment in common stock and an investment in options. Unlike common stock, an option has a limited life. An investor can hold common stock indefinitely, while every option has an expiration date. If an investor does not close out or exercise an option prior to expiration, it ceases to exist as a financial instrument. As a result, even if an option investor correctly picks the direction the underlying stock will move, unless the investor also correctly selects the period that movement will take place, the investor may not profit.
Options investors run the risk of losing their entire investment in a relatively short period and with relatively small movements of the underlying stock. Unlike a purchase of common stock for cash, the purchase of an option involves leverage. Leverage indicates that the value of the option contract generally will fluctuate by a greater percentage than the value of the underlying interest.
Content licensed from the Options Industry Council is intended to educate investors about U.S. exchange-listed options issued by The Options Clearing Corporation, and shall not be construed as furnishing investment advice or being a recommendation, solicitation or offer to buy or sell any option or any other security. Options involve risk and are not suitable for all investors.
Content licensed from the Options Industry Council. All Rights Reserved. OIC or its affiliates shall not be responsible for content contained on Merrill's Website, or other Company Materials not provided by OIC. OIC education can be accessed at the
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Without the Jargon
LEAPS® are options that have an expiration date greater than 1 year — hence the name Long-Term Equity Anticipation Securities. LEAPS® have the same anatomy as shorter dated equity options in terms of amount of contracts, underlying security, strike price, and expiration date. LEAPS® longer term expiration is what differentiates the option type from traditional equity options.
Information not provided by the Options Industry Council