An equity option is the right to buy or sell a number of shares, usually 100 per contract, of a particular stock (the “underlying”) at a fixed price by exercising the option before its expiration date. A Call option gives the purchaser the right to buy a stock at a certain price. A Put option gives the purchaser the right to sell a stock at a certain price. Calls and puts are distinct types of options and the buying or selling of one type does not involve the other. The buyer will pay a fee (called a ‘premium’) for each contract bought or sold.
With a call option, the purchaser has the right to buy, and the seller (writer) the obligation to sell, the underlying security
or index at a predetermined price (that is, the exercise or strike price) prior to expiration of the option.
The premium paid to the seller (writer) for the option is in consideration for the underlying obligations imposed on the seller
should the option be exercised. With a put option, the purchaser has the right to sell, and the seller has the obligation
to buy, the underlying security or index at the exercise price prior to expiration of the option.
In buying a call option, the purchaser expects that the market value of the underlying security or index will appreciate, which
would enable the purchaser of a call to buy the underlying security or index at a strike price lower than the prevailing
market price. The purchaser of the call option makes a profit if the prevailing market price is greater than the sum of
the strike price plus the premium paid for the option. The seller of a call option earns income in the form of the
premium received from the purchaser for the option and expects that the market value of the underlying security or index will
depreciate such that the option will expire without being exercised. The seller of a call option makes a profit if the prevailing
market price of the underlying security or index is less than the sum of the strike price plus the premium received.
Costs and Fees
The Firm charges a commission for executing client options orders in commission based brokerage accounts. The Firm’s commissions vary over a range depending on a number of factors including contract quantity, contract price, and type and value of
the order. Specific costs are disclosed in Janney’s commission schedule.
Option Risks
An option buyer’s risk is limited to the premium paid at time of purchase. Option buying may not be suitable for all investors because an investor may lose their entire investment in a relatively short period of time. Janney requires
clients to open a margin account to engage in options trading.
Special risks are involved with uncovered options writing that may expose the investor to potential losses. This type of strategy may not be suitable for all customers that have been approved for options trading. Losses that may occur could
be significant and must be understood before employing this strategy. Uncovered put writing is limited only to the price of the security dropping to zero. The investor should be aware of such potential loss. Uncovered call writing
has unlimited loss potential. This strategy is extremely risky and the extent of possible losses should be understood by the investor.
The use of uncovered option writing should be limited to those investors that are suitable to this investment. To employ this strategy, the investor must have substantial financial capability in which to withstand significant loss. Market
movements may require the investor to meet margin calls which would require more funds or securities in the account to meet the margin requirements. Absent the deposit of funds or securities, the investor’s assets in the account may be
liquidated to meet the margin requirements. In addition, this type of option writing should be consistent with the investor's objectives.
Option writers are subject to liquidity in the market where open contracts may not be closed as directed, which would subject the investor to possible assignment. If assigned, the investor may have to fulfill the terms of the contract by either
purchasing a security or delivering the underlying security. The investor should be aware that regardless of the liquidity of the market, he/she is always subject to possible assignment which may occur at a disadvantaged market conditions that
may result in substantial losses.
Any Janney client opening an options account will receive the Options Clearing Corporation “Characteristics and Risks of Standardized Listed Options”.
Payment for Order Flow
With regard to retail customer order flow, Janney does
not receive any monetary payment, service, property or
other benefit that results in remuneration, compensation, or
consideration to Janney from any broker or dealer, national
securities exchange, registered securities association, or
exchange member for execution, including, but not limited to:
research, clearance, custody, products or services; reciprocal
agreements for the provision of order flow; adjustment of
Janney’s unfavorable trading errors, offers to participate
as underwriter in public offerings; stock loans or interest
accrued thereon; discounts, rebates, or any other reductions
of or credits against any fee to, or expense or other financial
obligation of, Janney routing such retail customer order
flow that exceeds that fee, expense or financial obligation.
With regard to institutional customer order flow, Janney
may receive remuneration in the form of rebates from its
algorithmic trading services providers. However, any such
remuneration is generally offset by fees paid by Janney to its
algorithmic service providers for services provided to Janney
in the execution of institutional customer orders.
For additional information on the characteristics and risks of options please refer to the OCC website.