Options
Options allows investors to speculate on the price movements of assets such as stocks, commodities, and currencies. This involves a contract between two parties, giving the buyer the right to buy (call option) or sell (put option) the underlying asset at a specified price.
The parties pay a premium to participate in this contract, which the seller receives. Options provide buyers with the right, but not the obligation, to buy or sell a specific quantity of the underlying asset at a pre-agreed price, known as the strike price. The underlying asset can be stocks, commodities, currencies, or other financial securities.
Options enable investors to profit from price movements of the underlying asset without having to pay the full price of the asset itself. However, options are time-limited and expire worthless if not exercised.
The options premium is the price the buyer pays to the seller to acquire the right to buy or sell the underlying asset. The premium depends on various factors such as the volatility of the underlying asset, the time to expiration, and the strike price.
Call options give the buyer the right to buy the underlying asset at a pre-agreed price, while put options give the buyer the right to sell the underlying asset at a pre-agreed price. A call option is typically purchased when the investor expects the price of the underlying asset to rise, while a put option is purchased when the investor expects the price of the underlying asset to fall.
Overall, options provide investors with a flexible way to speculate on the price movements of assets while limiting risk. By purchasing options, investors can profit from price movements of the underlying asset without having to pay the full price of the asset itself. However, it is important for investors to be aware that options are time-limited and may expire worthless if not exercised.
There are various strategies that investors can employ when using options. One such strategy is the covered call, where an investor owns a stock and simultaneously sells a call option. The sale of the option generates income for the investor, which can reduce risk if the stock price falls.
Another strategy is the protective put, where an investor buys a put option to protect their portfolio from losses. If the price of the underlying asset falls, the investor can exercise the put option and sell the underlying asset at a higher price to offset losses.
You should also be aware that it can lead to different actions on your portfolio depending on the option and positioning.
- With an in-the-money long call option, the underlying asset is purchased at the strike price and booked into your portfolio. However, if the option is out of the money, you lose the option premium you initially paid.
- In the case of an in-the-money long put option, the underlying asset is sold at the strike price and booked out of your portfolio. In case you do not own the stock position, a short position is created! However, if the option is out of the money, you lose the option premium you initially paid.
- In the case of an in-the-money short call option, the underlying asset is booked out of your portfolio. In case you do not own the stock position, a short position is created! However, if the option is out of the money, you keep the option premium you initially received and the option expires worthless.
- With an in-the-money short put option, the underlying asset is booked into your portfolio and you must pay the purchase price. However, if the option is out of the money, you retain the option premium initially collected and the option expires worthless.
Options have different effects on your portfolio at expiration, depending on whether they are in the money or out of the money.
This page gives you a brief overview of how expiring option positions are handled.
Basically, FXFlat/IB has the following rules:
- Stock options, which are due in the current month and are in the money by 0.01 USD or more, are automatically exercised by the broker or the Options Clearing Corporation (OCC), without any explicit instruction by the broker.
- Index options, which are due in the current month and are in the money by 0.01 USD or more, are automatically exercised by the broker or OCC, without any explicit instruction by the broker.
If you as an FXFlat client have "contrary intentions", you have to inform us explicitly in the TWS option exercise window if you:
- want to avoid the exercise of a stock or index option that is in the money by 0.01 USD or more.
- want to exercise a stock or index option that is in the money by less than 0.01 USD.
- exercise an out-of-the-money stock or index option.
Of course, you always have the possibility to react before the expiration date and manage your option positions.
Trading with FXFlat
The brokerage account allows you to trade options in over 17 countries. Trade well-tried option strategies such as "Cash Secured Puts" and "Covered Calls".
Of course, Trader Workstation also offers you the possibility to trade much more complex strategies and option combinations.
Options on stocks, indices, commodities, currencies and futures can be traded.
Benefit from a quick and easy transmission of option orders via our trading platform.
+ EU options from 1.90 EUR
+ US options from 2.90 USD
+ Trade quickly and effectively in many attractive trading venues