Scottrade Options?

Question

So Scottrade has some rules on their options tradng which I am quite confused on due to the complexity and their phrasiology. Anyway, My questions is can I buy to open both a put or a call, and then whether it goes down or up respectively, sell to close to make profit. It seems what they mentioned is you cannot sell certain items or trade options, just exercise. Secondly, I am a little nervous about Scottrade's statement that they will force the exercise of an option if it is itm. For example if I buy to open 1 contract for $100 put on a stock trading at $105 for around $2, hence expecting the stock to drop and the option to increase in value. If the stock does not fall, then my risk is $200. But what I am concerned about is if the stock falls to $100 and stays around there, will Scottrade automatically exercise my option and when? I would rather just sell the option and not have any of them exercised for obvious reasons. Any more info appreciated!

Answer 1

Buying a Put and a Call is called a "straddle".... doing the same way out of the money is a "strangle".  These are among the most common strategies for trading options.

There is no doubt that Scottrate would allow this. This is just as basic as a "vertical" or a "covered" call or put.

The exercising of an ITM call or put is a federal regulation on expiration Friday (3rd Friday of every month). Most people will sell it on Friday or a few days before.

Do you understand the impact of the Greeks on options?

If not, I'm sorry to say you shouldn't be trading options right now. Although your questions are very good.... you're no where near understanding them enough to trade them. This will lead to losses you won't understand.

Checkout;

www.optionaddict.com

www.optionplanet.com (free training)

www.redoption.com

www.cboe.com

There are also many great books out there to read!

Answer 2

them forcing the exercise of the option is a good thing!  it means that if you forget to do it on the exercise date, you don't miss your chance to cash in.  but just to give you a bit of piece of mind, the stock exchanges won't allow you to exercise an option when doing so would mean that you lose more money than if you had just let the option expire worthless.  if you only BUY options, then you can never lose more than you paid to acquire the option.

and when they talk about restrictions on selling options, they don't really mean "selling" options - they mean "writing" (or originating) options.  they can't stop you from selling something that they helped you buy (unless, as stated above, the exchanges prohibit them from letting you sell it).

but in any event, i have used scottrade for my IRA for about a year now, and have never been very happy with the level or quality of services that they provide.  if you are going to be trading options (or doing anything else even remotely related to the stock market) i would strongly suggest finding a different broker.

ultimately, though, any time an amateur gets themselves involved with naked options, the likelihood of anything good happening is remote.  most options (~80%) expire worthless, which is a great deal if you're going to be writing covered calls, but if you're going to be long the calls (or short the puts) it's another story.  do the homework and learn about options before you put any money on the line.  until you can at least comprehend black-scholes, stay away from derivatives.  besides, the volatility in the current market isn't enough to make naked calls (long) worthwhile, imho.

Answer 3

Most of the rules are set by the SEC and the options markets, and there is a standard brochure sent by law to all options traders, so it's not entirely Scottrade's fault if they are confusing.  

In general, any option you can buy you can sell. I think their statement about not selling options would only apply to illiquid options. Or you could be reading some rule about the opposite strategy from yours, where you sell (or write) the option first, and then hope to close it at a lower price. If they really have a blanket prohibition on selling all long options positions that would be bizarre, as it would shut down most of their business in options.

As for forced exercise, in the situation you describe of a long put position you don't have any worry if you sell the put before it expires. Look in the section on option settlement and you'll see they settle after the market closes on expiration day (on Saturday, as I recall). The same applies to a long call. If you're on the other side--selling an option--there is a theoretical possibility of forced exercise at any time, but it's pretty rare.

Hope this helps.