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 which can be found at the link here.

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.” This document can also be found at the link here.

Janney Receives Payment For Options Order Flow.

Janney receives payment and considerations from trading centers for equity and options order flow. Janney does not make equity or option order routing decisions based on the receipt of any order routing inducements. The Firm effectively manages any conflicts of interest by making order routing determinations based wholly on execution quality factors including price and timeliness. More information about Janney’s Options order routing practices is available at the link found here.

For additional information on the characteristics and risks of options please refer to the OCC website found here.

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

To learn about the professional background, business practices, and conduct of FINRA member firms or their financial professionals, visit FINRA’s BrokerCheck website: http://brokercheck.finra.org/