Options Trading FAQs

If a short call option is exercised, can I settle it with the underlying shares? Do I need to enable this function separately?

Settlement using underlying shares is the default settlement method. No separate action is required to enable this function.

Why do some US stocks not have options trading?

Longbridge currently supports options trading for most US stocks with high liquidity. Stocks without options may be excluded due to liquidity risks. We continuously assess the risk of different products and plan to expand the range of options available for trading.

Will the underlying shares be automatically covered after selling a call option (short call)?

Generally, selling a call option (short call) does not freeze the underlying position and your shares can still be sold. However, on the expiration date of the option, the underlying shares will be covered if the option reaches within 2% of the in-of-the-money, and the underlying shares will be locked and will be unable to be sold.

What will affect the change in options margin?

Apart from the price volatility of the option itself and the price volatility of the underlying stock, the margin requirement will also be affected by the expiry date of the option.

If I have sufficient margin but I do not close the option position on the expiry date, will it be automatically exercised?

It depends. Typically, an option with intrinsic value at expiration will be automatically 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 must have enough shares of the stock to cover the exercise. If you do not have sufficient 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 unless the position is closed before expiration. If there are insufficient funds in the account, the option will typically 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 have enough exercise margin. However, if there are insufficient funds in the account, the option will generally be liquidated.

Will the exercise fail if there are not enough funds in my account? If so, will the exercise fees still be deducted?

In general, we will increase the margin requirement for the option in advance to prevent exercise failure upon expiration. However, if the margin remains insufficient, we may close the option position.

If the margin continues to be insufficient, we may be forced to liquidate the options to cover the shortfall.

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

Yes, if you hold sufficient underlying stock while selling a call option, your margin requirement will be reduced or offset based on portfolio margin.

How can I tell if my option's initial margin level is insufficient? Do I need to calculate the option margin myself?

Calculating option margin can be complex, as it depends on factors such as stock price, position size, volatility, and liquidity risk. However, you do not need to calculate the margin yourself—our app will compute it for you. If your margin is insufficient when opening a position, you will receive a prompt indicating that the order exceeds your available buying power. You can review this information in the order details.

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 important to note that when selling options short, they can still be exercised even if they are out-of-the-money, particularly if the underlying stock is suspended.

As a call option seller, will I have a short share position?

When you sell a call option (Short Call) and the corresponding underlying stock supports short selling, it will be automatically exercised if the option becomes in-the-money and your account has sufficient margin, even if you do not hold enough underlying shares. However, if your account lacks sufficient margin, the option will typically be liquidated on the expiration date.

Do all types of options trading require margin?

Long call/put options require an option premium while short call/put options require a maintenance margin.

Is it true that option trades will not result in financing if I only have a buy position as the holder?

In-the-money options may incur margin and/or stock financing if exercised without sufficient funds in the account. However, if you buy put options or sell call options on stocks that do not support short selling, the position will typically be liquidated at expiration, preventing a negative stock position from occurring.

Can I exercise an option before the expiry date?


Currently, Longbridge does not support early exercise of options. Only automatic exercise on the expiration date is supported. However, please note that selling options may expose you to early exercise obligations.

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 on 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, an in-the-money option will be automatically exercised, which could result in a negative stock position. In such cases, you can choose to hold or close the short position.

Can the premium or margin between options be offset?

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

When selling a Short Call against a long stock position to form a Covered Call.

When selling a Short Put against a short stock position to form a Covered Put.

Can I use my commission coupons for options trading?

No, commission coupons cannot be used for options trading.

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, no additional margin requirements are imposed. However, the market value of the underlying position will be "locked" or "frozen." This ensures that the funds are reserved to cover the position if needed, and as a result, the locked value cannot be used for withdrawals or leveraged trading.

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

Increasing positions in the underlying stock will not impact existing covered call / covered put positions. In fact, it may increase the quantity of short call or put options that can be sold since it increases the holdings quantity of the underlying stock.

However, reducing positions in the underlying stock may result in insufficient quantity of the underlying stock, potentially leading to naked short options. In such cases, the account's margin requirements will be recalculated.

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, external links to the Penny Interval Program list are provided below:

• OCC - Penny Program (theocc.com)
• Penny Tick Type Reports (cboe.com)

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

When trading U.S. stock options, you may sometimes notice that orders are filled at worse prices while your own order, placed at a better price, is not filled. This can occur for several reasons:

1. Market Liquidity and Quotation Rules: While the liquidity of the options market may be normal, the special quotation rules in the U.S. market (BBO/NBBO) mean that the bid and ask prices you see represent the highest bid and lowest offer on a specific exchange. Orders may be routed to other exchanges for execution, leading to variations in pricing. Additionally, in less active markets, quotes from different exchanges may vary significantly and may not update in real-time, causing delays or unfilled orders.
2. Spread Orders: In the options market, spread orders—where both a long and short option are placed simultaneously—may not be filled unless both orders match the bid and ask prices. For example, if the bid price for a BABA option is $3.00, and a $2.80 sell order is placed as part of a spread, the order may not be filled at $3.00 if it is part of a spread strategy that requires matching prices.

These scenarios are common in the U.S. options market. The outcome of orders depends on exchange conditions and routing mechanisms.