The NASDAQ Options Trading Guide

The stock market can be a big gamble - like the Vegas slots. The house always wins! Learn to shift the odds in your favor, and become the house.

None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Some firms pay sales staff based on the amount of money invested by a customer and the number of transactions done in customer's account.

Understanding Options

A stock option is a contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell shares of an underlying stock at a predetermined price from/to the option seller (writer) within a .

Learn about common options concepts in Firstrade's introductory guide to options basics and trading. A stock option is a contract that gives the owner the right, but not the obligation, to buy or sell a particular stock at a fixed price the strike price for a specific period until expiration. The contract also obligates the seller or writer to meet the terms of delivery if the owner exercises the contract right.

A call is an option contract that gives the owner the right to buy the underlying stock at a specified price its strike price for a certain, fixed period until expiration. July 60 call entitles the buyer to purchase shares of XYZ Corp. For a call option writer or seller, the contract represents an obligation to sell the underlying stock if the option is assigned.

A put is an option contract that gives the owner the right to sell the underlying stock at a specified price its strike price for a certain, fixed period until expiration. For example, an XYZ Corp. July 60 put entitles the owner to sell shares of XYZ Corp. For the writer or seller of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned.

An option holder may exercise an American-style option any time before expiration. An option holder may exercise a European-style option only during a specified period before expiration. Currently, every European-style option is exercisable only on its expiration date. All exchange-traded equity options are American style. Most index options are European style. Conventional options typically offer contracts with expirations up to nine months in the future.

There are several recommended initial steps to find a broker: Talk with sales people at several firms. Ask about investment experience, professional background and education. Contact your state securities regulators to verify the license of a sales representative. FINRA will provide information on disciplinary actions taken by securities regulators and criminal authorities. State securities regulators also can tell you if a sales representative is licensed to do business in your state.

Understand pay and fee structures. Ask for a copy of the firm's commission schedule. Some firms pay sales staff based on the amount of money invested by a customer and the number of transactions done in customer's account.

Ask what fees or charges are required to open, maintain, and close an account. Evaluate what services meet your needs. Determine whether you need the services of a full-service or a discount brokerage firm. A full-service firm typically provides transaction services, recommendations, investment advice, and research support. A discount broker generally provides transaction services and does not make recommendations on securities to buy or sell. Fees may differ depending on services the firm provides.

The Investor Services department is a one-stop comprehensive options resource center that provides information and supports all products traded on all Options Clearing Council OCC participant exchanges. Investor Services assists investors with options-related questions without soliciting securities or providing investment advice. Known as The Characteristics and Risks of Standardized Options , this booklet briefly describes the characteristics of options and risks to investors of maintaining positions in options.

There is an SEC rule that requires the U. Prior to buying or selling an option, investors must read a copy of this booklet. You may find a complete list of seminar dates and locations on our Seminars page.

The strike price is the price at which an option holder can purchase call or sell put the underlying stock, sometimes called striking price, strike or exercise price. To read more about stock options trading, see our guide to exercising options next. Or maybe you hope to protect the value of your portfolio from a market downturn. No one objective is better than another, just as no one options strategy is better than another - it depends on your goals. Once you've decided upon an objective, you can begin to examine options strategies to find one or more that can help you reach that goal.

For example, if you want more income from the stocks you own, you might investigate strategies such as writing covered calls. Or, if you're trying to protect your stocks from a market downturn, you might think about purchasing puts, or options on an index that tracks the type of stocks in your portfolio. Based on the information you provide in the options agreement, your brokerage firm will approve you for a specific level of options trading.

Not all investors are allowed to trade every kind of strategy, since some strategies involve substantial risk.

This policy is meant to protect brokerage firms against inexperienced or insufficiently funded investors who might end up defaulting on margin accounts. It may protect investors from trading beyond their abilities or financial means. The levels of approval and required qualifications vary, but most brokerage firms have four or five levels. In general, the more trading experience under your belt, and the more liquid assets you have to invest, the higher your approval level.

Firms may also ask you to acknowledge your acceptance of the risks of options trading. Even if you have a general investment account, there are additional steps to take before you can begin trading options. First, you'll have to fill out an options agreement form, which is a document brokerage firms use to measure your knowledge of options and trading strategies, as well as your general investing experience. Before you begin trading options, you should read the document titled Characteristics and Risks of Standardized Options , which contains basic information about options as well as detailed examples of the risks associated with particular contracts and strategies.

In fact, your brokerage firm is required to distribute it to all potential options investors. You can't purchase options on margin, as you can with stocks. But some brokerage firms require that certain options transactions, such as writing uncovered calls, take place in a margin account. That means if you write a call, you'll have to keep a balance in your account to cover the cost of purchasing the underlying stocks if the option is exercised. If the value of the assets in your margin account drops below the required maintenance level, your brokerage firm will make a margin call, or notify you that you need to add capital in order to meet the minimum requirements.

If you don't take appropriate action, your brokerage firm can liquidate assets in your account without your consent. Since options can change in value over a short period of time, it's important to monitor your account and prevent being caught by a margin call. Visit us online at www. Getting Started in Options Since there are so many available options - and so many ways to trade them - you might not know where to begin.

Know What You Want And How to Get It Once you've decided upon an objective, you can begin to examine options strategies to find one or more that can help you reach that goal.

Doing the Paperwork Even if you have a general investment account, there are additional steps to take before you can begin trading options. Watch the Margins You can't purchase options on margin, as you can with stocks. Introduction Part 1 Part 2 Part 3. Delta Effect Strategies Contract Specifications.