What is the obligation in trading options?
In terms of trading, there is no obligation to trade. You can trade what, when and where you like.
I believe, in my experience, no options brokers will force you to trade or ask you to commit to any trading activity in order to maintain your account.
Your money can sit there and likely to earn interest for doing nothing. Consult your own broker for that.
However, you could obligate yourselves to buy or sell a financial product if you write/sell options on that particular underlying instrument (stock/bond/commodity futures).
Suppose you sell 1 call options on IBM stock, you are obligated to delivery/sell 100 IBM stocks to whoever bought it from you. That could be a market maker or someone who bought it in an open market.
This action is referred to as selling naked options which is highly not recommended.
Selling naked could potentially lose you more money then you initially invested.
If IBM jumped from $100 to $150, you would be hold accountable to deliver stock at $150 should the buyer asks for his stock. This means you would need to have $15,000 in your account upon a margin call or 100 stocks ready for delivery.
To hedge yourselves against this potential catastrophe, buy 1 options either 1 or more strike up or down to form a vertical spread. Ie: buy 1 110 IBM or 1 90 IBM call in the above example.
You could also buy 1 further month call on the same strike to form a horizontal spread aka calendar spread.
That’s the obligation for call options. Put options’ is exactly opposite where you are obligated to buy stock if the buyer decided to exercise his right to sell his stocks.
If you are a novice trader, it is most unlikely that your broker will allow you to sell naked options.
Let’s keep learning!
Category: OPTIONS BASICS
