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.
Please read the options disclosure document (PDF)
Options pricing models use five factors to determine an option's theoretical value:
- Stock or ETF price
- Strike price
- Time to expiration
- Interest rates (minus dividends)
- Volatility of the underlying stock
For shorter-term options, it is common to use an interest rate that approximates the risk-free interest rate. Most people use the U.S. Treasury-bill rate (90-day).
Pricing longer-term options is more difficult than pricing shorter-term options. To price a LEAPS® option, it is necessary to predict volatility (expectation of price fluctuation) of the underlying stock and interest rates for up to 2-½ years. Of the factors mentioned, interest rates play a more significant role in the pricing of longer-dated options due to the length of time. As a result, even professionals struggle to quote prices for options with maturity dates far in the future. The predictability of the inputs is more unreliable than for shorter-term options. Changes in implied volatility can also significantly alter LEAPS® options' premiums.
Despite difficulties, exchange policies generally require market makers and specialists to offer quotations (both bid and offer) for up to 10 contracts. This allows investors to find a market for LEAPS® at any time.
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
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A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
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The amount of the option premium that is attributable to the amount of time remaining until the expiration of the option contract.
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The market's forecast of a likely movement in the underlying security.