An option is a financial instrument that you can buy and sell with the goal of generating other income on stocks you already own or to speculate on stock price movements.
There are two basic types of options: calls and puts.
A call option contract gives the owner the right (but not the obligation) to buy a specified amount of an underlying security, typically 100 shares per contract, at a specified price within a specified time.
A put option contract gives the owner the right, but not the obligation, to sell a specified amount of an underlying security, typically 100 shares per contract, at a set price within a specified time. The buyer of a put option estimates that the value of the underlying asset will drop below the exercise price before the expiration date.
Please note: Options involve risk and are not suitable for all investors. Before investing in options, please read the Characteristics and Risks of Standardized Options.
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Based on the information you provided in your options application, ShareBuilder will assign an options trading level to your account.
Level 1 Typically, if you are new to options trading, you will be assigned to Level 1 trading. A Level 1 options trader has the ability to access and place options trades from the Covered Calls tab in the Options Trading section. From this page, you can:
Level 2 Level 2 options traders have the ability to access both the Covered Calls and Buy / Sell Options tab in the Options Trading section. Level 2 trading is geared towards more experienced options traders, and allows you to:
Depending on the type of options strategy you are trading (Covered Calls, Buy/Sell Options) you can choose between a market, limit, stop-loss or buy-stop order. These types of orders are explained below:
Market Orders
A market order is an order to buy or sell a security at the available market price. When placed during market hours (9:30am to 4:00pm ET), a market order will be processed immediately. Market orders placed during non-market hours will be entered when the market opens.
Market orders are available for all Covered Call and Buy/Sell strategies.
Note: There may be a short delay between the time your trade is completed and the time your positions are updated online.
Limit Orders
A limit order is a request to buy or sell a security once a customer-specified price has been reached or surpassed. Once the target price has been reached or surpassed, ShareBuilder will then process the trade. When entering a limit order you can specify whether the order is good for the day or until cancelled. “Good Until Cancel” orders will automatically expire after 60 calendar days.
Limit orders are available for all Covered Call and Buy/Sell strategies.
Important: In certain circumstances, it may not be possible to fill a limit order in a single market day. In these cases, ShareBuilder may partially fill the order over multiple days, which can lead to multiple charges of the real-time trade commission.
Stop-Loss Order
A stop-loss order is a request to sell a security once the market price reaches or falls below a customer-specified price. Once the target price has been reached or surpassed, ShareBuilder will then trigger a market order. A stop-loss order is typically used to sell a security to lock in profits if a security’s price falls or to limit losses on a security. When entering a stop-loss order, you can specify whether the order is good for the day or until cancelled. “Good Until Cancel” orders will automatically expire after 60 calendar days.
Stop-loss orders are only available when selling a call or a put to close a position on the Buy/Sell Options page.
Buy-Stop Order
A buy-stop order is a request to buy a security once the market price reaches or goes above a customer-specified price. Once the target price has been reached or surpassed, ShareBuilder will then trigger a market order. A buy-stop order is typically used to place a limit on how much a customer is willing to pay to close a short position. When entering a buy-stop order you can specify whether the order is good for the day or until cancelled. “Good Until Cancel” orders will automatically expire after 60 calendar days.
Buy-stop orders are only available on the “Buy to Close” choice on the Covered Call page.
For full commission details, please see our pricing and rates.
When your account is approved to use the features of the 'Buy/Sell Options' page, use the following instructions to assist you in placing an order:
Buy a call to open / Buy a put to open:
Sell a call to close / Sell a put to close:
Once you have placed your order, you can check its status by navigating to Trade > Order Status (log in required).
Note: Options involve risk and are not suitable for all investors. Before investing in options, please read the Characteristics and Risks of Standardized Options.
A margin account is an account offered by brokerages that allows investors to borrow money to buy securities. In a simplified example, an investor might put down 50% of the value of a purchase and borrow the rest from the broker. The broker charges the investor interest for the right to borrow money and uses the securities as collateral.
The specific calculations as to how margin works get a little more complicated, but you can learn about this in our Margin Trading Tutorial.
The important thing to understand about margin is that it has consequences. Margin is leverage, which means that both your gains and losses are amplified. Margin is great when your investments are going up in value, but the double-edged sword of leverage really hurts when your portfolio heads south. Because margin exposes you to extra risks, it's not advisable for beginners to use it. Margin can be a useful tool for experienced investors, but until you get to that point, play it safe.
Important: Buying securities on margin is not appropriate for all investors. Before investing on margin, please read the Margin Account Agreement for important risk disclosure information, and see ShareBuilder's margin interest rates.
Although a lot of securities can be bought on margin, some securities available through ShareBuilder are not. You can see if a stock is marginable by looking at the stock quote—under “Key Elements” which will indicate if it is a marginable security. ShareBuilder applies its own criteria that meets or exceeds the Federal Reserve Board in determining which securities can be bought on margin. Penny stocks, IPOs, extremely volatile stocks, and options are examples of securities that cannot be bought on margin.
Margin borrowing is a feature on an Individual or Joint brokerage account in which the broker (ShareBuilder) extends credit to you, the customer, to purchase securities or to withdraw excess cash for use outside your account. The account equity (securities and cash) is used as collateral for the loan that is taken out in the account.
If the value of the stock in the account increases, the buying power and loan availability of your account increases. Conversely, if the value of the stock drops sufficiently, you will be required to deposit more cash or sell a portion of the stock to cover a margin call.
Buying Power, sometimes referred to as purchasing power, is the money (cash and margin) available to an investor to buy marginable securities in an account approved for margin. Buy orders will always use the money market cash balance before using credit. As a result, once the cash balance reaches zero, the loan balance will be created. A basic way, but not 100% accurate, to calculate your buying power is as follows:
Note: Non-marginable securities do not contribute to your buying power. In addition, some marginable securities may have an initial rate higher than 50%, which reduces the buying power.
Even if you do not have cash or currently have a margin loan balance, you may still be able to purchase additional securities if your buying power is greater than zero.
Your buying power may fluctuate with the value of your securities throughout the day. Transactions that affect buying power throughout the day include trade executions, open trade orders and money movement into and out of the account. When using buying power to place a trade to buy securities, the order cannot put the account into a maintenance call. You should also note that an account will not have buying power if the equity in the account goes below the minimum equity requirement.
Securities products are offered by ShareBuilder Securities Corporation, a registered broker-dealer and Member FINRA/SIPC. ShareBuilder Securities Corporation is a subsidiary of ING Bank, fsb. Brokerage Financial Statement