Options offer the right (to the keeper of the Long Call and Put contract), and obligation (to the keeper of the Short Call and Put contract) to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) before a specific date (expiration date). This article provides a detailed overview of options trading at EXANTE, covering key concepts, margin requirements, and important considerations.
Understanding Option Contracts
Expiration Date: The final day the option remains valid. On this date, the option is either exercised (if profitable for the holder) or expires worthless.
Strike Price: The predetermined price at which the underlying asset can be bought (call option) or sold (put option) if the option is exercised.
Premium: The price of the option contract. It's influenced by factors such as the price of the underlying asset, it's volatility, and time to expiration.
Contract Size: Each option contract includes a specific number of shares of the underlying stock. You can find details about the contract size in the Contract Multiplier section of the Instrument Info for the contract you wish to trade.
Option Exercise and Expiration
Options contracts have a limited lifespan, ending on their expiration date. It's essential for options traders to understand how the exercise process works and what happens when the contract expires.
In-the-Money (ITM): An option is considered ITM if exercising it would result in a profit. A call option is ITM, when the market price of the underlying asset exceeds the strike price. A put option is ITM, when the market price of the underlying asset is lower than the strike price.
Out-of-the-Money (OTM): An option is OTM if exercising it would result in no profit. OTM options will expire worthless if not exercised before the expiration date.
Automatic Exercise: At EXANTE, any ITM options held on the expiration date are automatically exercised, ensuring you don't miss out on potential profits.
Early Exercise: American-style options, commonly available at EXANTE, allow you to exercise at any time before the expiration date. To exercise an option early, simply send a request to [email protected]. (You should keep the Long Call or Put position)
Settlement: When an option is exercised—whether automatically at expiration or early by request—the delivery of the underlying asset takes place on the next working day after the expiration date.
Options and Margin
Options trading requires margin, even though no leverage is provided. Margin requirements are dynamic and depend on factors like implied volatility, strike price, and the overall portfolio composition.
Long Options: The margin requirements for long options typically don't exceed the value of the option itself. However, for deliverable options approaching expiration and likely to be ITM, the margin may increase due to the delivery risk.
Short Options: Short options carry higher risk, so they have minimum margin requirements. As the option moves closer to being ITM, the required margin increases accordingly.
Purchasing Put Options Without Holding the Underlying Shares
Clients who wish to purchase put options without owning the required number of underlying shares may proceed with the transaction. However, margin requirements will differ from those who hold the underlying shares, generally being higher when the shares are not held.
Expiration of Put Options Without Sufficient Shares
If a put option is in-the-money (ITM) at expiration and the client does not hold enough shares to meet the contract requirements, the option will be fully exercised. This means that:
The required number of shares will be sold.
If the client holds fewer shares than needed, a short position will be created for the remaining shares.
A margin call may be triggered if there is insufficient margin to support the short position. For example, if a client holds 150 shares but has two put contracts requiring 200 shares, 200 shares will be sold, leaving the client with a short position of 50 shares.
Call Options and Insufficient Funds at Expiration
For call options, if a client does not have enough funds to cover the cost of exercising the option at expiration, Exante has a risk management system in place:
Three days before expiration, margin requirements shift from the long option value to the risk array value, accounting for possible delivery.
If there is insufficient margin at this stage, a margin call may be triggered.
If the option is in-the-money but the client lacks sufficient funds, the option may expire worthless, and the investment could be lost. The transaction will not be executed without sufficient collateral.
Collateral Management for Options Trading
One of the key aspects of options trading at Exante is that collateral is not automatically blocked for delivery. Clients must proactively manage their funds and holdings to ensure they can meet delivery obligations upon exercise.
Put Options: The corresponding underlying shares are not blocked to ensure delivery. Clients must ensure they have sufficient holdings or margin to cover potential obligations at expiration.
Call Options: Neither the necessary funds nor the underlying shares are blocked to guarantee exercise. Clients must manage their cash to cover the purchase of the underlying shares when the option is exercised.
Important Considerations:
Trading Fees: Standard trading fees apply to option contracts. All trading fees are listed in the article Fees overview: exchange-imposed fees and can be found in your Client’s area → Terms → Commissions.
Delivery: We handle the delivery of underlying assets, such as futures, stocks or cash. For instance, if an option contract for INTC.CBOE expires In-The-Money, the corresponding INTC shares will be delivered to your account.
Margin Call: If your account lacks sufficient margin to cover potential losses, EXANTE may close your option positions to prevent a margin call. In this case, closing the position will incur a fee of 90 EUR.
Examples
Buy Call:
When buying a call option, you're essentially paying for the right to buy an underlying asset (like a stock) at a specific price (the strike price) before a certain date (the expiration date).
You profit if the asset's price increases significantly above the strike price.
The maximum loss is limited to the premium paid for the option.
Consider the expiration date, strike price, and premium carefully. The premium is multiplied by the contract size (usually 100 shares) to determine the total cost.
Buy Put:
Put options can act as insurance against potential price declines. They give you the right to sell an asset at the strike price.
You profit if the asset's price falls below the strike price.
When buying a put option, consider the expiration date, strike price, and premium. The maximum loss is limited to the premium paid.
Sell Call:
Selling a call option generates premium income upfront. This is attractive but carries significant risk.
You are obliged to sell the underlying asset at the strike price if the buyer decides to exercise the option. This can lead to losses if the price of the asset rises substantially.
Selling calls is generally suitable for experienced traders who are bearish or neutral on the underlying asset.
Sell Put:
Selling a put option also generates premium income upfront.
You are obligated to buy the underlying asset at the strike price if the buyer decides to exercise the option. This can lead to losses if the price of the asset decreases significantly.
Selling puts is generally suitable for experienced traders who are bullish or neutral on the underlying asset.
Which price determines ITM (In the Money) or OTM (Out of the Money) status?
For most options, the settlement price—the official closing price of the underlying asset on the expiration date—determines whether the option is ITM or OTM. After-hours trading activity typically does not influence this.
However, some options may use a different price for settlement, such as the opening price on the expiration day. Be sure to check the specific contract details in the Instrument Specification for confirmation.
How do I roll an option contract?
"Rolling" an option means extending your position to a later expiration date. At EXANTE, you can do this manually by following these steps:
Close your existing position: Sell your current option contract.
Open a new position: Buy a new option contract with the desired expiration date (and potentially a different strike price).
What happens if I don't have enough funds for delivery?
If you exercise a call option to buy shares but lack sufficient funds to cover the purchase, or if you exercise a put option but don't own the underlying shares, EXANTE may close your position to prevent a margin call.
This forced closure may result in a fee of 90 EUR.
Can an option seller be obligated to exercise before expiration?
Yes, this is known as early assignment. While American-style options allow the buyer the right to exercise early, the seller is obligated to fulfil that transaction.
Early assignment is more likely to occur with specific options (such as those that are deep in-the-money and closer to expiration).