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Options FAQs
What is an option? An option is a contract that entitles the buyer to buy (call) or sell (put) a predetermined quantity (usually 100 shares) of an underlying security for a specific period of time at a pre-established price. It is called a derivative investment, since the value of the option is derived from the price of the underlying security. How do I get approval for option trading? In order to trade options, we require a signed options application by all parties on the account. If you have Adobe Acrobat Reader, you may obtain an options application from our Forms Download Center. Otherwise, you may request an application through e-mail or via the telephone. Why do I need approval for option trading? Options are very risky derivative securities, the leveraging power of options can generate considerable returns, or lead to significant losses. For your protection, we require investors to submit an application for options trading. What are the Minimum Account Requirements to place option trades? While Firstrade requires no minimum balances to open an account or invest in equity securities, we do require minimum balances in order to place certain option orders. The following table lists the option strategy and the minimum equity required to place option orders:
Why am I not allowed to write uncovered calls? You cannot write uncovered (naked) calls because of the high levels of risks involved. For example, if you write a naked call and the price of the underlying security rises, there's no limit as to how much you can potentially lose if the stock keeps rising. What are the commissions for option trading? Trading options at Firstrade costs only $6.95 for both market and limit orders with no minimum amount required! Just add $0.75 for each contract, which represents 100 shares of the underlying security. Two-legged complex option orders are charged a single commission but contract fees are charged on each leg. How do I exercise my option contract? To exercise your option contract, simply send us an e-mail detailing which option contract you would like to exercise. Please provide your first and last name, Firstrade account number, the number of contracts you would like to exercise, the symbol, month, and strike price of the contract to exercise. What happens if I don't exercise my options? If the premium is $0.05 or above on the last day of trading, we will automatically exercise the contract for you. If the premium is below $0.05, the option will expire. Firstrade reserves the right to close an option position that may be subject to exercise or assignment, depending upon account equity and market conditions. Options involve risk and are not suitable for all investors.
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