Frequently Asked Questions About Options: Part 3

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...continued from Part Two

Can I Trade Options In My IRA?
Probably - depending on your brokerage firmís policies and procedures regarding trading in Retirement Accounts. Some firms take a more liberal view of what types of trading can or cannot be made in a Retirement Account. Youíll want to find a firm that offers you the flexibility you desire.

How Do Employee Stock Options Differ From Standardized Options?
Employee stock options differ in many ways from what many refer to as standardized (or ìordinaryî) options. First, employee stock options are not traded on exchanges. In contrast, standard options are traded on up to six exchanges in the United States.

Second, employee stock options are not standardized, whereas exchange traded options have standardized terms, normally representing 100 shares of the underlying equity.

Lastly, employee stock options generally are not transferable. Standardized options are fungible (interchangeable) and can be bought and sold during exchange trading hours on any exchange that lists them.


I Recently Sold A Covered Call To Open And Noticed That The Value Of The Option Appears As A Negative In My Account. How Can This Be?
When you open a short option position, your account will be credited the premium of the option less commissions. However, to account for the position, brokerage firms generally show the short option as a negative in the account - essentially subtracting the market value of the call from the account net worth.

Think of when you buy stock. You do not immediately make the amount of the purchase, rather there is a debit in the account equal to the cost of the stock plus commissions.

If you started with $5,000 and purchased $5,000 worth of stock, there is a credit for the stock and a debit for the cost. The account value is still $5,000 (assuming the stock price does not change).

When shorting options (like a covered call), you are credited the proceeds and debited the option value. If the option eventually goes worthless, this debit would become zero. If the short option was not subtracted from the value of the account, the value would appear inflated.

To prevent this, the market value of the short option is subtracted from the account net worth. The proceeds from the option however, are generally available to use for other investments or to remove from the account.

This should be discussed further with your broker as we can only generalize how they may be accounting for your positions.

What Is The Difference Between American-Style Exercise And European-Style Exercise?
All standardized equity options use American-style exercise. American-style exercise means that operationally you can exercise your contract any day that the market is open before the expiration date.

The last day to exercise an American-style option is usually the third Friday of the month in which the contract expires (expiration Friday). Most index options, however, use European-style exercise. This means that the only time you can operationally exercise your contract is the last trading day (usually Friday) before expiration.

Remember, even though there is only one day in which you can exercise your contract, you can always close out your option position in the secondary market any day prior to expiration.

continued in Part Four...

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