LEAPS® and Bounds: An Introduction to Long-Term Options
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 long- term options 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 A separate client agreement is long- term options. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.
These options may share the same strike, but the similarities stop there. You might expect the delta to be about 0. Because the stock price being used for the calculation is higher than the strike price, the option is technically in the money, so the delta is higher. The reasons can get complicated, but think of it this way: gamma measures how much the delta changes based on a small move in the stock.
Select to close help pop-up 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.
But options can be just as effectively used by the longer-term investors to gain leverage that simply going long a stock does not afford. In other words, you can be an investor, not a trader, using options. And you can use these options to go long, as well as short. If you believe the Lipitor patent expiration will really hurt Pfizer Inc.
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.
Replacing Stock with Longer Dated Options
Select to close help pop-up 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? Risk varies depending upon the strategy followed.
It is important for an investor to understand fully the risk of each strategy. Stock vs. Unlike common stock, an option has a limited life.
The average price of a stock in the TSX 60 has almost doubled in the last decade. This translates to significantly more capital being required to purchase shares of an underlying stock. Many investors with smaller account sizes may consider using long-term options as an alternative to buying shares of a stock. In this post we explore comparing buying stock to long-term options. To learn more on trading long-term options, view our latest webinar on this topic!
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.
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