There are special risks associated with uncovered option writing that may expose investors to significant losses. 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 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, OptionsHouse may request significant additional margin payments. If an investor does not make such margin payments, OptionsHouse may close stock or 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 of losses is substantial and unlimited.
- If a secondary market in options in which an investor holds positions were to become unavailable, investors could not engage in closing transactions, thus an option writer would remain obligated until expiration or assignment in that option and the option writer’s potential risk of losses would be substantial and unlimited.
- The writer of an American-style option is subject to being assigned from the time the option has been written until the option expires. By contrast, the writer of a European-style option is subject to exercise assignment only during the exercise period.