Options

An option is a contract entered into between a seller and a buyer on a recognized market, in which all contract terms and conditions (called “specifications”) other than the consideration (called the “premium”) for the option are standardized and predetermined by the recognized market. The premium that the buyer pays to the seller is determined on the market in accordance with supply and demand and takes into account factors such as the option’s term, the difference between the exercise price of the option and the market price of the product, price volatility, and other features of the optioned product.

There are two types of options—call options and put options. A buyer who pays the call price has the right to purchase the optioned product at a fixed price within a set time. The seller can be obliged to sell this product to a buyer who exercises his option. A buyer who pays the put price has the right to sell the product at a fixed price within a set time. The seller can be obliged to sell the product to an investor who exercises his option. When the transaction is concluded, it is cleared through a clearing house affiliated with the recognized market on which the option is traded.

Buyers may choose to exercise an American or a European option, regardless of the location of the recognized market. American options may be exercised at any time before the option expires, whereas European options may only be exercised on a specific date.

The buyer of an option that expires loses the premium paid for the option and the transaction costs. The seller of an option that expires obtains the premium received for the option, less the transaction costs, as a gain.

Risk Level

Options may be used in various investment strategies. You should carefully assess your tolerance to the risks involved in this type of trading.

Options are of limited duration. Buyers therefore run the risk of losing their entire investment in a relatively short period of time. There can be no guarantee that a liquid secondary market will exist for these options. In addition, an option seller has no control over the assignation procedure.

When an option account is opened, your investment advisor will give you an Information Document published by the clearing houses. This document details the risks inherent in each of these option types.