Option trading is a high risk type of trading. Before trading, please read Option Risk Disclosure.
1. About Options
Options refers to a right to buy or sell a certain number of a specific commodity at a specific price at a specific future time. It is a right of choice. It is also a financial instrument produced based on futures, which gives a buyer (holder) the right to buy or sell the underlying asset. An option holder has the right to choose to buy or not to buy or to sell or not to sell the underlying asset within a specified timeframe, and can either execute or waive such a right, while an option seller only assumes the obligations as stipulated by option contract.
2. Types of Options
(1) Options are classified into call options and put options by rights of the options:
- Call Options: After paying certain amount of premiums to option seller, option buyer has the right to buy a certain quantity of specific commodity prescribed by option contract from the option seller at predetermined price in the valid period of the option contract, but is not obliged to buy. And the option seller is obliged to sell specific commodity prescribed by the option contract at predetermined price in the option contract upon request of option buyer in the valid period provided by the option contract.
- Put Options: After paying certain amount of premiums to option seller, option buyer has the right to sell a certain quantity of specific commodity prescribed by option contract to the option seller at predetermined price in the valid period of the option contract, but is not obliged to sell. And the option seller is obliged to buy specific commodity prescribed by the option contract at predetermined price in the option contract upon request of option buyer in the valid period provided by the option contract.
(2) Options are classified into American options and European options by delivery date of options:
- American options: It can exercise rights at any time in the valid period prescribed by option contract;
- European options: It can exercise rights only on the expiry date prescribed by the option contract and option buyer can not exercise his rights before the contract expiry date. The contract will automatically become invalid after expiry.
The vast majority of US stocks options are American options, while index options are generally European options.
(3) Options are also classified into stock options, stock index options, interest rate options, commodity options and foreign exchange options by the object in the option contract.
3. Important terms for options
(1) Strike Price, also referred to as exercise price: If the market price of X share is USD10 and you buy USD15 of call option, the strike price will be USD15.
(2) Expiration Date, also referred to as exercise date: If the option bought by you expires on December 18, 2015, then that day is the expiration date.
(3) Open Interest: The quantity of contracts that are not due and executed yet.
(4) Contract: Unit of option is contract, and each contract represents ownership of 100 shares.
(5) Settlement type: Stock options are generally settled in the form of Physical settlement, while Index options are generally settled in the form of Cash settlement.
(1) What is the minimum trading unit for US stock options?
The minimum trading unit for 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) Are pre-opening and post-closing option transactions allowed?
No, options shall be traded in EST 9:30–16:15.
(3) When will the options be exercised?
Exercise at expiration: Options will generally be exercised or cancelled after the close of trading on the expiration date; if the expiration date is a holiday, the exercise or cancellation time may vary, please refer to the change in your account for details.
Exercise in advance: The right party of the option, i.e. the buyer, does not support exercising the option in advance in Tiger Trade APP; the duty party of the option, i.e. the seller, may be requested by the right party (buyer) to exercise the option in advance at any time.
(4) Can the bought options be closed out at any time before the expiry date?
The options, whether under 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.
(5) How to manage the options with inactive exercise or within exit price?
Automatic exercise will occur for stock options due within current month and at a price of USD0.01 or above, but close position will occur as per market price if the investor’s margin does not confirm to the exercise conditions. If it is impossible to close out at market price due to insufficient liquidity or other causes, Tiger retains the rights of the invalid options, which process will result in the loss of entire value of such options.
(6) How to deal with the options, if the price of the bought options (whether call options or put options) is lower than 0.01 and the investor does not conduct active exercise or close out on the expiry date?
In such a case, the options will become invalid automatically and you will suffer from the loss of all option premiums. In general, active exercise (if any) will result in further losses at this point.
(7) Is it possible to find automatic avoidance, margin closeout and systematic exercise for options in transaction records?
Yes, you can click order details for relevant records and descriptions.
(8) Why is any option order not filed?
Option orders may be not filed for the following reasons:
- Out-of-sync quotes from different exchanges make it impossible to file the orders timely;
- There are different tick sizes for different exchanges;
- Due to existence of combined order for options, the submitted unilateral buy/sell orders for options are not always filed. For baba’s an option bought at 4.40 and sold at 4.50, any 4.50 unilateral buy order may be not filed because it is just a part of a certain combined order;
- There is no market liquidity.
- Forced liquidations prior to expiration,
- Allow the options to lapse,
- Allow options to be exercised and liquidate other positions.
(11) Index options with which expiration date are available for trading?
Tiger currently supports Index options with expiration dates that fall on Monday\Wednesday\Friday.
(12) 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.)
(13) How to distinguish between Weekly options and Monthly options?
Weekly Options has "W" identifier after the Expiration date on the Options Chain, Monthly options don't have "W" identifier.
(14) Which Index options are available for trading?
Tiger currently supports SPX, DJX, NDX, VIX, XSP, NANOS and may open more Index options for clients to trade.