Options trading is a high-risk type of trading. Before trading, please read Exchange Traded Options Product Disclosure Statement (PDS), Target Market Determination (TMD) and ASX Understanding Options Trading Booklet.
1. About Options
Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. An options contract offers the buyer the opportunity to buy or sell the underlying asset. The holder is not obligated to buy or sell the asset and can choose to exercise the right or let it lapse. On the contrary, the seller of the option contract has the obligation to perform the contract, that is, either buy or sell the underlying.
TBAU is currently only offering Level 1 options trading, which allows you to buy call and put options only. If you would like to trade options, you will be required to complete an options trading assessment to make sure you understand the risks of the product and have the financial means to trade this product.
2. Types of Options
(1) Options are classified into call options and put options by rights of the options:
- Call Options: After paying the premium in connection with the purchase of the contract, the buyer has the right, but not obligation, to buy the underlying asset at a predetermined price on or before a predetermined date. When the option is exercised, the options seller is obliged to deliver the underlying asset as per terms prescribed in the contract.
- Put Options: After paying the premium in connection with the purchase of the contract, the buyer of the options has the right to sell the underlying asset at a predetermined price on or before a predetermined date. When the option is exercised by the buyer, the options seller is obliged to buy the underlying asset as per terms prescribed in the contract.
(2) Options can be also classified into American options and European options:
- American options: the option can be exercised at any time prior to expiry;
- European options: the option can be exercised only on expiry date ;
- The vast majority of US stocks options are American options, while index options are generally European.
(3) Options can be also classified into stock options, stock index options, interest rate options, commodity options and foreign exchange options by the type of underlying asset.
3. Important terms for options
(1) Strike Price, also known as exercise price, is a set price at which a derivative contract can be bought or sold when it is exercised.
(2) Expiration Date, also known as exercise date, is the last day that an option is valid.
(3) Open Interest is the number of contracts that are not expired or executed.
(4) Contract size is generally 100 units of the underlying assets..
(5) Stock options are generally settled by physical delivery, while Index options are generally cash settled.
(1) What is the minimum trading unit for US stock options?
The minimum trading size of US stock options is 1 contract, generally equivalent to 100 shares.
For example, SPY, with any call option that has the expiry date of March 11, 2016 and strike price of 195.5, the current price is USD2.1 and thus the contract value is USD2.1*100 = USD210.
(2) What is the commission fee for options?
Please go to the Tiger Brokers Official Website > Pricing > Options to view the latest commission fee for options.
(3) Are pre-opening and post-closing option transactions allowed?
No, options shall be traded during U.S. EST 9:30–16:15.
(4) When will the options be exercised?
Exercise at expiration: Options will generally be exercised or expired after the close of trading on the expiration date; if the expiration date is a holiday, the exercise or expiry time may vary, please refer to the change in your account for details.
Early Exercise: For options buyers, American options currently offered by TBAU can be ONLY exercised on expiry and not before. TBAU may change this rule from time to time, which will be communicated to clients in advance. The options seller, however, may be requested to fulfill their obligation any time prior to expiry upon exercise by buyer.
(5) Can the options be closed out at any time before the expiry date?
The options, whether long buying or short selling, can be closed out as per the market price at any time within the trading period before the expiry date.
(6) What happens if you do not exercise or close out an in the money stock option by expiry date?
Subject to your account having sufficient available funds, the stock option will be automatically exercised if it is in the money for at least USD0.01. If your account balance is insufficient, the position will be closed at market price. If it is impossible to close out at market price due to insufficient liquidity or other causes, Tiger retains the rights to lapse the option, which may result your total loss of the option.
(7) What happens if the price of your taken options (whether call options or put options) is lower than 0.01 and the investor does not exercise or close out the position by the expiry date?
In such case, the options will expire and you will suffer the total loss of all option premiums paid. Comparing to let option lapse, exercising the option in this situation will generally result in larger losses.
(8) Can you track the record of option expiry, automatic exercise and close out by system?
Yes, you can click order details for relevant records and descriptions.
(9) What are the causes leading to an option order not being filled?
Options orders may not be filled for the following reasons:
- Quotes are not synced among exchanges, which makes it impossible to fill the orders timely;
- Different exchanges has different tick sizes;
- For certain option strategies, where there is more than one option involved and required to be filled at the same time, the option, any and each leg, will not be filled unless all can be filled at the same time.
- There is no market liquidity.
(10) What should I do if there is insufficient funds or insufficient underlying stocks in my account on the Option Contract Expiration Date to exercise options?
TBAU currently only allows cash accounts to buy call and put options.
In terms of call options, Tiger Brokers usually calculates the required fund for exercising in-the-money or near-in-the-money options at any time on the date of expiration before closing. In case of insufficient cash in your account, Tiger may liquidate position(s) in your account to prevent cash deficiency from option exercise. If you anticipate that you will be unable to have positive cash after the option exercise, you should either close positions or deposit additional funds as expiration nears.
In terms of put options, if there aren't underlying stock(s) that can be sold in your account, Tiger Brokers may liquidate all long put option(s) on the date of expiration before close in case of short position(s) in your account.
Please note, if the underlying stock of the put option is sold after the options market is closed and this leads to a short position in the underlying stock after the put option is exercised, Tiger will adjust your exercise quantity without any notice, to avoid the short position.
Tiger reserves the right to:
- Force liquidations prior to expiration,
- Allow the options to lapse,
- Allow options to be exercised and liquidate other positions.
(11) What expiry date of stock options are available for trading?
Tiger currently supports only the stock options with the expiry date on Friday, but may offer stock options with different expiry in the future.
(12) What expiry date of index options are available for trading?
Tiger currently supports Index options with expiration dates that fall on Monday/Wednesday/Friday.
(13) What is the difference between Weekly Index options and Monthly Index options?
Weekly Index options are generally settled in the form of P.M. Settlement (The last trading day is the Expiration date, the options will be settled at the settlement value which is calculated after the closing of the expiration date based on the price of the underlying contract; Monthly Index options are generally settled in the form of A.M. Settlement (The last trading day is the T-1 day of the Expiration date, the options will be settled at the settlement value which is calculated after the opening of the expiration date based on the price of the underlying contract.)
*Not including VIX, Weekly and Monthly options of VIX are all settled in the form of A.M. Settlement.
(14) How to distinguish between Weekly options and Monthly options?
Weekly Options has "W" identifier after the expiration date and monthly options don't have "W" identifier.
(15) Which Index options are available for trading?
Tiger currently supports SPX, DJX, NDX, VIX, XSP, NANOS and may offer more Index options for clients to trade in the future