Risk of Loss from Options Trading Sample Clauses

Risk of Loss from Options Trading. A buyer of options may choose to offset his position or exercise the options or can simply allow the options to lapse. If the Client chooses to exercise the options, he /she will receive a cash settlement where 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 is paid to the buyer. Otherwise the Client 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 at the exercise price specified under the contract. If options expire worthless, the buyer’s loss equals the amount of premium. A seller (writer) of options receives premium from a buyer and is bound to perform his obligation should the buyer exercise the options. The seller is required to make margin deposit. Upon the buyer’s exercise of options, the seller who does not offset his position is required to either make the cash settlement where 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 is paid to the buyer, or make or take delivery of the underlying asset (physical delivery) where he will receive payment of or pay for the underlying asset delivered or taken at the exercise price specified under the contract. If options expire worthless, the seller’s gain equals the amount of premium. Due to the fact that the maximum loss of a buyer of options is limited to the premium, he/she is to pay the premium but is not required to make margin deposit. On the other hand, the seller’s losses can be unlimited therefore he is required to make margin deposit with a derivatives agent to secure his/her performance under the options similar to the case of futures trading. With an unfavourable movement in the market against his/her position, a seller of options may sustain a loss well in excess of the amount of margin deposit made within a relatively short period of time.
Sample 1
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Related to Risk of Loss from Options Trading

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