What are Option Contracts?

Characteristics

We offer option contracts for you to buy or sell. If you purchase option contracts, you will have the right to buy or sell an underlying asset at a fixed price within a certain period of time. If you sell option contracts, you will have the obligation to buy or sell an underlying asset at a fixed price within a certain period of time if the options are exercised by the contract owner. This is often referred to as an option assignment. Various exchanges operating in the United States and regulated by the SEC offer public trading markets where different types of options are bought and sold, such as equity, index, and interest rate options.

An option contract known as a “call” option, gives the buyer the right to purchase the underlying asset at a set exercise price for a limited period of time. The seller (or “writer”) of a call option is obligated to sell the underlying asset at the exercise price for a limited period of time. An option contract known as a “put” option gives the buyer the right to sell the underlying asset at a set exercise price for a limited period of time. The seller (writer) of a put option is obligated to buy the underlying asset at the exercise price for a limited period of time. Most options have certain standardized terms that indicate the nature and amount of the underlying asset, the expiration date, the exercise price, and whether the option is a call or put. Many securities that are publicly traded in the United States have put or call options contracts, which are available for trading on an exchange in the United States. Equity options, for example, are designated by reference to the issuer of the underlying security, the expiration month or expiration date of the option, and the option’s exercise price and type (put or call).

The price of the option is referred to as the “premium.” If you buy an option contract, you are paying the premium for the right to purchase or sell the underlying asset at a set price any time up through the expiration date of the option. If you sell (write) an option contract you are receiving the premium and are obligated to buy or sell the underlying asset at a set price if the owner of the option contract decides to exercise them any time before or at their expiration date. The premium is not a standardized term of the option contract. The premium does not constitute a “down payment.” The premium does not include any commission that might apply to the transaction.

Prior to buying or selling options, you will receive a copy of the “Characteristics & Risks of Standardized Options”, also known as the options disclosure document (ODD). Investors should read a copy of the ODD prior to buying or selling an option. The ODD is created and maintained by the Options Clearing Corporation (the OCC) and it contains required disclosure on the characteristics and risks of standardized option contracts. Investors should review the main options disclosure document and the supplemental documents, which the OCC updates from time to time. The ODD document and supplemental updates available on the OCC’s website.

No certificates are issued to show your ownership of an option. You must review the confirmations and statements that you receive from us in order to confirm your positions in options as of the date of the confirmation or statement. It is very important to understand that long option positions that are “in the money” by a penny or more will be automatically exercised on the options expiration date. This means you will buy the underlying asset at the exercise price stated on the contract if you own calls or sell the underlying asset at the exercise price stated on the contract if you own puts. If you do not want the options to be exercised, you must close out the long option position prior to the market close on the expiration date of the option contract.

Fees and Costs

You will typically pay a commission every time you buy or sell an option contract. You will pay this commission in addition to the premium associated with the option contract, which you will pay regardless of whether you choose to exercise the option to buy or sell the underlying asset. The commission is a one-time variable fee, based on the price of the contract and the number of contracts in the transaction. If you exercise an option or are assigned on an option position, you will also be charged a commission on the purchase or sale of the underlying security.

• For example, if you purchase 8 Call contracts, you will typically pay a $63.60 commission, regardless of whether you choose to exercise the option.

More Information

Information about the commission fees you will pay BFE for options transactions is available on our Equity and Option Commission Schedule.

More information describing the characteristics and risks associated with options trading is also available on FINRA’s Options Resource Page for investors and on the OCC’s website.