Options Trading FAQs

1. Can a short call option be settled with the underlying stock if it's exercised? Do I need to enable this specific feature separately?

By default, the underlying stock is used for settlement if a short call option is exercised, and there's no need to enable this feature separately.

2. Why are some US stocks not available for options trading?

Longbridge currently supports options trading for most highly liquid US stocks. However, options for stocks with lower liquidity may pose higher market risks, which is why they may not be available. We regularly evaluate the risks of our products and plan to increase the number of options for trading.

3. Will the underlying stock be automatically covered after selling a call option (short call)?

In general, selling a call option (short call) does not lock in the corresponding underlying position, and you can still sell the stock. However, if the option is out-of-the-money by less than 2% on the expiration date, the underlying stock will be automatically covered. After being covered, the underlying stock will be frozen and can't be sold.

4. What factors can cause changes in options margin requirements?

In addition to fluctuations in the prices of the option itself and the underlying stock, longing calls and shorting puts are also affected by the option's expiration date. This means that as the expiration date approaches, the margin requirement for these options may increase.

5. If I have sufficient margin and do not exercise my options or cannot sell them at expiration, will they be automatically exercised?

It depends. Typically, an option with intrinsic value at expiration will automatically be exercised. However, if there is insufficient exercise margin, we will take appropriate action, which may include liquidating the position.

Example

For long puts and short calls, if the underlying stock is not available for short selling, you need to have enough shares of the stock to cover the exercise. If you do not have enough shares, the option will usually be liquidated. If the stock is available for short selling and you have enough exercise margin, an in-the-money option will be automatically exercised if you do not close the position by expiration. However, if there is not enough funds in the account, the option will generally be liquidated.

For long calls and short puts, an in-the-money option will usually be automatically exercised if you do not close the position by expiration and you have enough exercise margin. However, if there is not enough funds in the account, the option will generally be liquidated.

6. Will the exercise fail if there is not enough funds in my account to exercise the option? Will the exercise fee still be charged if it fails?

In general, we will increase the margin requirement of the option in advance to prevent exercise failture upon expiration. However, if the margin is insufficient, we may close out the option.

However, if the margin is still insufficient, we may be forced to liquidate the options with insufficient margin.

7. Does Longbridge support margin reduction for covered call options strategy for US stocks?

Yes, if you hold sufficient underlying stocks while selling a call option, you can reduce or offset the margin requirements for the short call option.

8. How do I know if my option initial margin level is insufficient? Do I need to calculate the option margin myself?

Calculating option margin can be complex, as it is influenced by various factors such as stock price, position size, volatility, and liquidity risk. However, you do not need to calculate the option margin yourself. If there is insufficient margin when opening a position, you will receive a prompt indicating that the order amount exceeds the maximum buying power, which you can check in the order details.

9. Will in-the-money options be automatically exercised? What is the trigger point?

Options may be exercised once they reach USD 0.01 in-the-money, depending on the specific situation. However, it is worth noting that when selling options short, they may still be exercised even if they are out-of-the-money (especially when the underlying stock is suspended).

10. As the selling party, can I hold a short position on the stock if the option is exercised?

When you sell a call option (Short Call) and the corresponding underlying stock supports short selling, if your account does not hold enough underlying shares, and the option becomes "in-the-money", it will be automatically exercised. If your account does not have enough margin, the option will generally be liquidated on the expiration date.

11. Do all types of options trading require margin?

Long call and long put require an option premium, while short call and short put require a maintenance margin.

12. Can I hold only a long position in options to avoid incurring debt?

In-the-money options may incur debt if exercised without sufficient funds. However, if you buy put options or sell call options with stocks that do not support short selling, it will be liquidated at expiration, so a negative stock position should not normally occur.

13. Can I exercise an option before the expiry date?


Currently, Longbridge does not support early exercise of options. Only automatic exercise on the expiry date is allowed. Selling options may be subject to early exercise obligations.


Long Call / Short Put: When the option is exercised, you have to buy the underlying stock at the strike price specified in the option contract. The quantity of the underlying stock you buy is determined by multiplying the option's exercise unit by 100. At the same time, the option will be expired.

Long Put / Short Call: When the option is exercised, you have to sell the underlying stock at the strike price specified in the option contract. The quantity of the underlying stock you sell is determined by multiplying the option's exercise unit by 100. At the same time, the option will be expired. If you don't hold a sufficient number of shares of the underlying stock, it may result in a short selling position.

14. What should I do if my option is exercised at expiration and I have a negative stock position?

If you buy put options or sell call options with stocks that do not support short selling, your account should not normally have a negative stock position. However, if the underlying stock supports short selling, in-the-money will be automatically exercised, resulting in a negative stock position. You can choose to hold the short position or close the position.

If the short selling feature of your Longbridge Integrated A/C has not been activated, the negative position may be liquidated on the second trading day after the option is exercised.

15.Can option premiums or margins offset each other?

Longbridge currently supports the reduction or offsetting of margin requirements in the following scenarios:

• When selling a Short Call with a long stock position to form a Covered Call.
• When selling a Short Put with a short stock position to form a Covered Put.

16. Can you use my commission coupon for options trading?

Sorry, the commission coupon is not supported for options trading.

17.Why is there still a margin lock-up after the margin reduction for a covered short call strategy?

When you sell a short call option backed by an underlying stock position, we do not impose additional margin requirements. However, the market value of that underlying position will be locked (or frozen). This locked value cannot be used for withdrawals or leveraged trading, ensuring that there are sufficient funds in the account to close the position if necessary.

18.How does adding or reducing positions affect a covered call or covered put strategy?

If you hold the underlying stock, adding or reducing positions will not affect your existing covered call or covered put strategy. However, increasing the underlying stock position may allow you to sell more calls or puts. On the other hand, reducing the underlying position could result in insufficient stock to deliver if the option becomes in-the-money (ITM) at expiration, potentially leading to a naked short option. In that case, the account's margin requirements will be recalculated.

19.What is the Penny Interval Program for options?

The Penny Interval Program allows specific options to be traded with a minimum increment of USD 0.01.

The minimum increments for all classes listed in the Penny Interval Program, except for QQQs, IWM, and SPY, are as follows:

• For all options with a premium value below USD 3, the minimum increment is USD 0.01.
• For all options with a premium value of USD 3 and above, the minimum increment is USD 0.05.
• For all options series in QQQs, IWM, and SPY, the minimum increment is USD 0.01.

For options outside the Penny Interval Program list, the minimum increments are as follows:

• For all options with a premium value below USD 3, the minimum increment is USD 0.05.
• For all options with a premium value of USD 3 and above, the minimum increment is USD 0.10.

Example 1: If you are trading an option listed in the Penny Interval Program and submit a buy order for USD 6.39. Since the option falls under the Penny Interval Program list and has a premium value of over USD 3, the minimum increment for the option is USD 0.05. Therefore, your buy order of USD 6.39 will not have a higher priority than a buy order of USD 6.35 in the market. It is even possible that the buy order of USD 6.35 gets executed while your buy order for USD 6.39 will be rejected or remains unmatched.

Example 2: If you are trading an option outside the Penny Interval Program list and submit a buy order for USD 10.25. As this option is not included in the Penny Interval Program and its premium value is over USD 3, the minimum increment for the option is USD 0.10. Therefore, your buy order of USD 10.25 will not have a higher priority than a buy order of USD 10.20 in the market. It is even possible that the buy order of USD 10.20 gets executed while your buy order for USD 10.25 will be rejected or remains unmatched.

Example 3: If you are trading an option outside the Penny Interval Program list and submit a buy order for US$2.28. Since this option is not included in the Penny Interval Program and has a premium value below USD 3, the minimum increment for the option is USD 0.05. Therefore, your buy order of USD 2.28 will not have a higher priority than a buy order of USD 2.25 in the market. It is even possible that the buy order of USD 2.25 gets executed while your buy order for USD 2.28 will be rejected or remains unmatched.

For reference, you can find external links to the Penny Interval Program list provided below:

OCC - Penny Program (theocc.com)

Penny Tick Type Reports (cboe.com)

20. Why option orders with a better price than the last traded price are sometimes not filled?

When trading U.S. stock options, you may sometimes observe that some orders are filled at worse prices but your own order placed at a better price is not filled. This may be caused by the following reasons.

1. The liquidity of the options market is normal. However, due to the special quotation rules of the U.S. market (BBO / NBBO), the bid and ask you see are the highest bid and lowest offer price of a particular exchange. Some orders may be routed to other exchanges for transactions.

In addition, when the market is inactive, it is possible for quotes from different exchanges to vary widely but not be updated timely, which may result in orders not being filled.

2. Since there are Spread Orders in the market, an individual buy/sell order may not be filled.

For example, some brokerage firms allow customers to make a spread order by placing a Long Call order and a Short Call order. Both orders will be filled at the same time only if the prices of both orders match the ask and bid.

To take a specific example, an option on BABA has a bid price of $3.00 and the order is part of a spread order matched on the exchange. A $2.80 sell order submitted at this time may not be filled at 3.00.

All of the above descriptions are normal for the U.S. market. The options orders have been submitted and the outcome depends on the exchange.