Risk of Loss from Options Trading Sample Clauses

Risk of Loss from Options Trading. A buyer of options may choose to offset the position or exercise the options, or can simply allow the options to lapse. If the buyer chooses to exercise the options, the buyer will receive a cash settlement of the cash difference between the exercise price and the market value, or price of the underlying asset or variable at a time or a period of time in the future as set out in the contract. Otherwise, the Customer may choose to make or take delivery of the underlying asset (physical delivery) where it will receive payment of, or pay for, the underlying asset delivered or taken delivery of at the exercise price specified under the contract. If options expire without value, the buyer’s loss equals to the amount of the premium. A seller of options receives premium from a buyer and is bound to perform the obligations should the buyer exercise the options. The seller is required to make a margin deposit. Upon the buyer’s exercise of options, the seller who does not offset his/her position is required to either make the cash settlement of the cash difference between the exercise price and the market value, or price or value of the underlying asset or variable at a time or a period in the future as set out in the contract to the buyer; or make or take delivery of the underlying asset (physical delivery) where he/she will receive payment of, or pay for, the underlying asset delivered or taken delivery of at the exercise price specified under the contract. If options expire without value, the seller’s gain equals to the amount of the premium. Since the maximum loss of a buyer of options is limited to the premium, buyer is required to pay a premium, but not required to make a margin deposit. On the other hand, the seller’s losses can be unlimited, similar to futures trading, therefore, seller is required to make a margin deposit with a derivatives agent in order to secure the seller’s performance under the options. Similar to futures trading, a seller of options may sustain loss substantially within a short period, which may exceed the initial margin value provided to the derivatives agent in case of unfavourable movement in the market against his/her position.
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