![]() ![]() For further assistance, please call The Options Industry Council (OIC) helpline at 888-OPTIONS or visit for more information. No statement in the booklet should be construed as a recommendation to buy or sell a security or to provide investment advice. The booklet contains information on options issued by OCC. Franklin Street, Suite 1200, Chicago, IL 60606 (86 or 888-OPTIONS). It may also be obtained from your broker, any exchange on which options are traded, or by contacting OCC at 125 S. Before buying or selling options, you must receive a copy of Characteristics and Risks of Standardized Options issued by OCC. Options involve risk, including the possibility that you could lose more money than you invest. Options are a leveraged investment and are not suitable for every investor. ![]() *Because of the substantial risk, Vanguard doesn't allow you to write uncovered calls. Because you may have to borrow to raise the cash to buy the shares, your loss might be higher than the value of the shares at the strike price. XYZ becomes worthless, but you have to buy 100 shares at the strike price anyway. Therefore, the maximum loss is the value of the shares at the strike price. On paper, you've lost $500, plus whatever you lost in raising the cash. You then use that money to buy the shares of XYZ, which are currently worth only $3,000. You buy the shares of XYZ for $3,500, even though they're only worth $3,000. You keep the premium charged for the put. Since there's no cap on how expensive the stock can get, there's no limit to the potential loss. The value of XYZ rises exponentially high, and you have to buy 100 shares at this price and then sell them at the strike price. The value of your shares of XYZ rises exponentially high, but you can't profit from them, because you have to sell them at the strike price. You keep the premium charged for the call. You keep the premium charged for the call, along with your shares of XYZ. You buy 100 shares of XYZ for $5,000 and then sell them for $4,500. You sell your shares of XYZ for $4,500, even though they're now worth $5,000. So there's no limit to your opportunity loss. In that case, the additional risk is that you'll have to sell something else-or borrow from your broker-in order to raise cash to buy the security and close out the option.Įven puts that are covered can have a high level of risk, because the security's price could drop all the way to zero, leaving you stuck buying worthless investments.įor covered calls, you won't lose cash-but you could be forced to sell the buyer a very valuable security for much less than its current worth. Puts can also be uncovered, if you don't have enough cash in your brokerage account to buy the security at the option's strike price, should the option buyer choose to exercise it. For this reason, many brokerages, like Vanguard, don't allow you to write uncovered calls. That's when you don't already own the security (or enough of the security) to sell the buyer if he or she chooses to exercise the call.īecause there's no limit to how high a stock price can rise, there's no limit to the amount of money you could lose writing uncovered calls. ![]() The riskiest options are uncovered ("naked") calls. So your potential losses could be substantial, even unlimited. Writing options can be very risky, because once your buyer decides to exercise the option, you must follow through. ![]()
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