Features & Services Section

Introduction to options trading

Introduction to options trading

An option is a contract giving the owner the right, but not the obligation, to buy or sell the underlying instrument at a specified price for a specified period of time.

Unlike shares of stock, an option does not represent ownership in the underlying company. An option represents the potential for change in ownership, but it must be exercised to make that happen.

See How to add features to an account for additional information and instructions on adding options trading to an account.

  • Many trading possibilities with varying degrees of potential for risk and profit
  • Can provide greater trading flexibility by protecting or enhancing portfolios in rising, falling, and neutral markets
  • Can help reduce risk by hedging against a drop in stock prices
  • Make market directional trades without buying or selling stock
Type of options
Master accounts
  • The firm's master account must have options approval level meeting or exceeding the end client's account options approval level.
  • Clients may have multiple accounts with option, margin, and short account trading capability.
Account Transfer
  • If the delivering firm's account contains options, the Schwab account must already have options approval for the same or higher trading level as the incoming account.
  • The option will not transfer if it is within three weeks of the expiration date.

 

Level 0
  • Long stock / short calls (covered calls)
  • Long stock / long puts (protective puts) (no indexes)
  • Short stock / short puts (covered puts) (margin accounts only)
  • Short stock / long calls (protective calls) (margin accounts only)
  • Collar (long stock / short calls / long puts)
  • Cash secured equity put writing
Level 1
  • Long puts and calls
  • Long straddles
  • Long combinations
  • Long strangles
  • Cash secured index put writing
  • Any level 0 transactions
Level 2
(Margin required)
  • Credit and debit spreads
  • Diagonal call and put spreads
  • Ratio spreads (long side heavy)
  • Any level 0 or 1 transactions
Level 3
(Margin required)
  • Uncovered puts and calls
  • Short straddles
  • Short strangles
  • Short combinations
  • Any level 0,1, or 2 transactions
FeesNo set-up fees, but commissions and per-contract fees associated with executed trades typically apply.
Risks

The purchase or writing of option contracts involves a high degree of risk and is not suitable for all investors. Inherent risks in option trading include, among others:

  • With long options the investor may lose 100 percent of principal invested.
  • Uncovered short options strategies involve potentially unlimited risk.
  • Options generally lose time value as their expiration date approaches.
  • The option holder is not entitled to any dividends from dividend-paying stocks unless the stock is purchased before the ex-dividend date.
  • The option holder is not entitled to voting rights or any other benefits of stock ownership until the stock is purchased. 
  • Like other securities, options carry no guarantees, and the success of an option strategy depends on the underlying asset.
  • Corporate actions may add complexity, costs, and risks with regard to a position or strategy.
  • The OCC (formerly known as Options Clearing Corporation), regulatory agencies, or the options markets may impose position size and exercise restrictions.
Tax consequencesAn option strategy may have income tax consequences resulting from entering into a hedging transaction or any offsetting position such as writing covered calls.
 
Specific tax risks include constructive sale rules, potential disallowed losses with wash sales, and restarting or halting of holding period. Consult your tax professional regarding the impact of a specific strategy.
Equity requirementsThere are no minimums to have the option feature, but accounts containing certain option strategies must maintain equity requirements. See the specific requirements by type at Schwab margin rates and requirements.
Account typeOption approval level 0Option approval level 1Option approval level 2Option approval level 3
Charity accountNoNoNoNo
Community propertyYesYesYesYes
Company retirement account masterNoNoNoNo
Company retirement account participantYesNoNoNo
ConservatorshipYesNoNoNo
Contributory IRAYesYesYesNo
CustodialYesNoNoNo
Custodial IRAYesNoNoNo
Custodial Roth contributory or conversion IRAYesNoNoNo
DBAYesYesYesYes
Designated beneficiary community property WROSYesYesYesYes
Designated beneficiary individualYesYesYesYes
Designated beneficiary joint tenantYesYesYesYes
Education savings accountYesNoNoNo
Estate (To liquidate existing positions only)    
FiduciaryNoNoNoNo
Fiduciary trustNoNoNoNo
GuardianshipYesNoNoNo
Incorporated: C or S corporation, non-incorporated: sole proprietorship, limited liability company, partnership, non-incorporated associationYesYesYesYes
IndividualYesYesYesYes
Individual 401(k)YesNoNoNo
Inherited IRA, inherited Roth IRA, spousal, and non-spousalYesYesNoNo
Investment clubYesYesYesYes
Joint tenantYesYesYesYes
Life tenancyYesYesYesYes
Living trust (if allowed by trust)YesYesYesYes
Minor-inherited IRA and minor-inherited Roth IRAYes (only for custodian)NoNoNo
PCRAYesNoNoNo
Pledged asset accounts at Schwab BankNoNoNoNo
QRP/Keogh participantYesNoNoNo
Qualified retirement plansNoNoNoNo
Rollover IRAYesYesYesNo
Roth contributory and conversion IRAYesYesYesNo
SEP IRAsYesYesYesNo
SIMPLE IRA masterYesYesYesNo
SIMPLE IRA participantYesYesYesNo
Stock liquidation service accountNoNoNoNo
Tenants by entiretyYesYesYesYes
Tenants in commonYesYesYesYes
Testamentary trust (if allowed by trust)YesYesYesYes
UsufructoryYesYesYesYes

*Requests for index hedging exceptions for certain accounts may be permitted in Level 0.
Effective February 6, 2012, Schwab no longer opens accounts using the charity, DBA, or investment club registration types.
Some exceptions may apply.

 

How to add features to an account
Introduction to margin
Introduction to Limited Margin

To learn more about options, review The Characteristics and Risks of Standardized Options.

For any additional questions, contact your Schwab service team.