Merrill A Bank of America Company Merrill A Bank of America Company Open an account Login Open Menu bar Find answers to common questions at MerrillSchedule an Open an accountwith Merrill Select to viewMenu in a popup windowBack to Options Education Hub Options involve risk and are not suitable for all investors. [+] Show details and the options disclosure document. 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 rights 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 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge. The maximum loss, gain and breakeven of any options strategy only remains as defined so long as the strategy contains all original positions. Trading, rolling, assignment, or exercise of any portion of the strategy will result in a new maximum loss, gain and breakeven calculation, which will be materially different from the calculation when the strategy remains intact with all of the contemplated legs or positions. This is applicable to all options strategies inclusive of long options, short options and spreads. To learn more about Merrill's uncovered option handling practices, view Naked Option Stress Analysis (NOSA) (PDF). Early assignment risk is always present for option writers (specific to American-style options only). Early assignment risk may be amplified in the event a call writer is short an option during the period the underlying security has an ex-dividend date. This is referred to as dividend risk. Long options are exercised and short options are assigned. Note that American-style options can be assigned/exercised at any time through the day of expiration without prior notice. Options can be assigned/exercised after market close on expiration day. View specific Merrill Option Exercise & Assignment Practices (PDF). Supporting documentation for any claims, comparison, recommendations, statistics, or other technical data, will be supplied upon request. Options are financial instruments that provide flexibility in almost any investment situation. Options give you options by providing the ability to tailor your position to your situation. The two types of equity options are calls and puts. A call option gives its holder the right to buy 100 shares of the underlying security at the strike price, any time before the option's expiration date. The writer (or seller) of the option has the obligation to sell the shares. The opposite of a call option is a put option, which gives its holder the right to sell 100 shares of the underlying security at the strike price, any time before the option's expiration date. The writer (or seller) of the option has the obligation to buy the shares. For illustrative purposes only. An option's price is called the premium. The option holder's potential loss is limited to the initial premium paid for the contract. Alternately, the writer has unlimited potential loss. This loss is somewhat offset by the initial premium received for the contract. Investors can use put and call option contracts to take a position in a market using limited capital. The initial investment is limited to the price of the premium. Investors can also use put and call option contracts to actively hedge against market risk. Investors can purchase a put as a hedge to protect a stock holding against an unfavorable market move while maintaining stock ownership. A call option on an individual stock issue may be sold to provide a limited degree of downside protection in exchange for limited upside potential. The underlying security (such as XYZ Corporation) is the instrument that an option writer must deliver (in the case of call) or purchase (in the case of a put) upon assignment of an exercise notice by an option contract holder. Most options that expire in a given month usually expire on the third Friday of the month. Therefore, this third Friday is the last trading day for all expiring equity options. This day is called Expiration Friday. If the third Friday of the month is an exchange holiday, the last trading day is the Thursday immediately preceding this exchange holiday. Many products now offer short-term options with weekly expirations, so investors should know the exact contract terms, including expiration dates, for all contracts they trade. After the option's expiration date, the contract ceases to exist. At that point, the owner of the option who does not exercise the contract has no right and the seller has no obligations as previously conveyed by the contract. Content licensed from the Options Industry Council is intended to educate investors about U.S. exchange-listed options issued by The Options Clearing Corporation, and shall not be construed as furnishing investment advice or being a recommendation, solicitation or offer to buy or sell any option or any other security. Options involve risk and are not suitable for all investors. Content licensed from the Options Industry Council. All Rights Reserved. OIC or its affiliates shall not be responsible for content contained on Merrill's Website, or other Company Materials not provided by OIC. OIC education can be accessed at the OIC web site popup. 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 rights and obligations and be aware of the risks involved in investing with options. An equity option can represent a bullish, bearish, or neutral strategy. An equity option is issued as a call or a put which determines if the contract contains the right to buy (call) or the right to sell (put). Each contract represents 100 shares of the underlying security. The strike price represents the price at which the underlying security can be purchased or sold at. The expiration date determines how long the contract is in effect. The purchaser of an equity option has the right to execute upon the contract or sell to close the contract in the options market at any time until the expiration date. The price at which the contract is bought to open or sold to close upon is called the premium. Information not provided by the Options Industry Council Select to close menu× What is an Option? What are the Benefits and Risks? Options Pricing Leverage and Risk Exercising Options The Option Chain Equity Option Basics Equity Index Options LEAPS® - Options for the Long Term LEAPS® Pricing Adjusted OptionsTime Erosion vs. Delta Effect Delta Theta Gamma Vega Rho Previous slide of 3❮Next slide of 3❯ Slide 1 of 3Slide 2 of 3Slide 3 of 3 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 rights 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 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge. The maximum loss, gain and breakeven of any options strategy only remains as defined so long as the strategy contains all original positions. Trading, rolling, assignment, or exercise of any portion of the strategy will result in a new maximum loss, gain and breakeven calculation, which will be materially different from the calculation when the strategy remains intact with all of the contemplated legs or positions. This is applicable to all options strategies inclusive of long options, short options and spreads. To learn more about Merrill's uncovered option handling practices, view Naked Option Stress Analysis (NOSA) (PDF). Early assignment risk is always present for option writers (specific to American-style options only). Early assignment risk may be amplified in the event a call writer is short an option during the period the underlying security has an ex-dividend date. This is referred to as dividend risk. Long options are exercised and short options are assigned. Note that American-style options can be assigned/exercised at any time through the day of expiration without prior notice. Options can be assigned/exercised after market close on expiration day. View specific Merrill Option Exercise & Assignment Practices (PDF). Supporting documentation for any claims, comparison, recommendations, statistics, or other technical data, will be supplied upon request. View definitions for investment terms in our The material was provided by a third party not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circ*mstances and, if necessary, seek professional advice. For purposes of all the computations discussed in this article, commissions, fees and margin interest and taxes, have not been included in the examples. These costs obviously will impact the outcome of any stock or option transaction. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsem*nt, recommendation or solicitation to buy or sell securities. Past performance is not a guarantee of future results. This material is being provided for informational purposes only. Nothing herein is or should be construed as investment, legal or tax advice, a recommendation of any kind, a solicitation of clients, or an offer to sell or a solicitation of an offer to invest in options. The information herein has been obtained from third-party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. MAP6291570-08222025 OSE Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets. Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (PDF). Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as "MLPF&S" or "Merrill") makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation ("BofA Corp."). MLPF&S is a registered broker-dealer, registered investment adviser, Member Securities Investor Protection (SIPC) popup and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp"). Merrill Lynch Life Agency Inc. (MLLA) is a licensed insurance agency and wholly owned subsidiary of BofA Corp. Banking products are provided by Bank of America, N.A. and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation. Investment products offered through MLPF&S and insurance and annuity products offered through MLLA: Privacy|Security|Glossary|Advertising practicespopupAdvertising Practicespopup © 2024 Bank of America Corporation. All rights reserved. 4326521
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FAQs
Equity Option Basics: Terminology and How They Work? ›
An equity option is issued as a call or a put which determines if the contract contains the right to buy (call) or the right to sell (put). Each contract represents 100 shares of the underlying security. The strike price represents the price at which the underlying security can be purchased or sold at.
How do equity options work? ›A stock option (also known as an equity option), gives an investor the right—but not the obligation—to buy or sell a stock at an agreed-upon price and date. There are two types of options: puts, which is a bet that a stock will fall, or calls, which is a bet that a stock will rise.
What is the easiest way to explain stock options? ›A stock option is the right to buy a specific number of shares of company stock at a pre-set price, known as the “exercise” or “strike price.” You take actual ownership of granted options over a fixed period of time called the “vesting period.” When options vest, it means you've “earned” them, though you still need to ...
What is the difference between stock options and equity options? ›Stock options give employees the option to buy a certain number of shares at a predetermined price within a specified period. Equity, on the other hand, gives employees actual shares of the company, either outright or subject to vesting conditions.
What are the basics of equity options? ›An equity option is a contract that conveys to its holder the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) shares of the underlying security at a specified price (the strike price) on or before a given date (expiration day).
How do equity options settle? ›Options may be "cash settled" or "physically delivered." All equity (single stock) and ETF options physically deliver when exercised or assigned. In other words, at expiration, in-the-money options are exchanged for shares in the underlying security (equity or ETF).
How to do options for beginners? ›You can get started trading options by opening an account, choosing to buy or sell puts or calls, and choosing an appropriate strike price and timeframe. Generally speaking, call buyers and put sellers profit when the underlying stock rises in value. Put buyers and call sellers profit when it falls.
Is options trading hard to understand? ›The main disadvantage of options contracts is that they are complex and difficult to price. This is why options are often considered a more advanced investment vehicle, suitable only for experienced investors.
What is option strategy in simple words? ›Option strategies are the simultaneous, and often mixed, buying or selling of one or more options that differ in one or more of the options' variables. Call options, simply known as Calls, give the buyer a right to buy a particular stock at that option's strike price.
Which option strategy is best for beginners? ›5 options trading strategies for beginners
- Long call. In this option trading strategy, the trader buys a call — referred to as “going long” a call — and expects the stock price to exceed the strike price by expiration. ...
- Covered call. ...
- Long put. ...
- Short put. ...
- Married put.
Mar 28, 2024
How do you actually make money from options trading? ›
The most common options trading strategies to generate income are covered calls and cash-secured puts. A covered call involves selling a call option on an underlying asset that you own, and the premium collected from the sale of the call option provides income.
What is the basic understanding of options trading? ›Options trading is a type of financial trading that allows investors to buy or sell the right to purchase or sell an underlying asset at a fixed price, at a future date. Options trading operates on the basis that the buyer has the option to exercise the contract but is not under any obligation to do so.
How is equity paid out? ›Each company pays out equity differently. The two main types of equity are vested equity and granted stock. With vested equity, payments are made over a predetermined number of installments delineated by a contract. Granted stock is provided at the beginning of a contract.
What is an example of an equity option? ›Equity option example
Let's say that Alphabet shares are trading at $730. You buy an option to purchase shares of Alphabet before the end of the week at $800, and pay a premium of $25 to do so. If Alphabet's share value exceeds $825, then the trade is in profit, and you are free to execute the trade.
Buying options involves the risk of losing the initial premium but offers the potential for unlimited gains. Selling options can generate immediate income but exposes the seller to potentially unlimited losses. If sellers also buy other options to make spreads, it will limit both their upside and their downside.
Do equity options always cover 100 shares? ›The terms of an option contract specify the underlying security, the price at which that security can be transacted (strike price), and the expiration date of the contract. In the case of stocks, a standard contract covers 100 shares, but the share amount may be adjusted for stock splits, special dividends, or mergers.
How long does it take for equity options to settle? ›Most stocks and bonds settle within two business days after the transaction date. This two-day window is called the T+2. Government bills, bonds, and options settle the next business day.