There are special risks associated with uncovered option writing, which exposes the investor to potentially significant loss. Therefore, this type of strategy may not be suitable for all customers approved for options transactions.
- The potential loss of uncovered call writing is
unlimited. The writer of an uncovered call is in an extremely risky
position, and may incur large losses if the value of the underlying
instrument increases above the exercise price.
- As with writing uncovered calls, the risk of writing uncovered put
options is substantial. The writer of an uncovered put option bears
a risk of loss if the value of the underlying instrument declines below
the exercise price. Such loss could be substantial if there is a significant
decline in the value of the underlying instrument.
- Uncovered option writing is thus suitable
only for the knowledgeable investor who understands the risks, has the
financial capacity and willingness to incur potentially substantial
losses, and has sufficient liquid assets to meet applicable margin requirements.
In this regard, if the value of the underlying instrument moves against
an uncovered writer's options position, the investor's broker may request
significant additional margin payments. If an investor does not make
such margin payments, the broker my liquidate stock of options positions
in the investor's account with little or no prior notice in accordance
with the investor's margin agreement.
- For combination writing, where the investor
writes both a put and a call on the same underlying instrument, the
potential risk is unlimited.
- If a secondary market in options were to become
unavailable, investors could not engage in closing transactions, and
an option writer would remain obligated until expiration of assignment.
- The writer of an American-style option is subject to being assigned an exercise at any time after he has written the option until the option expires. By contrast, the writer of a European-style option is subject to exercise assignment only during the exercise period.
NOTE: It is expected that you will read CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS available from TradeStation Securities. In particular, your attention should be directed to the chapter entitled Risks of Buying and Writing Options. This statement is not intended to enumerate all of the risks entailed in writing uncovered options.
