Trading options

  • How do I become eligible for investing in portfolios that trade options at Covestor?
    To be eligible to invest in portfolios that trade options, you will first need options trading permission at Interactive Brokers. This is an opt-in permission that you must set in your IB account after confirming that you have received and read a document by the Options Clearing Corporation. Additionally, to enable options trading in your Covestor account, you will also need to enable options trading in your Covestor account by reviewing, acknowledging and signing the enable options screen.
  • Why do I need extra account permission to invest in options-based portfolios?
    Options are more complex financial securities than stocks or bonds. There are additional risks involved in this type of investment. It is important that clients understand and agree to the risks involved in trading this type of security. The extra account permission required at both Interactive Brokers and Covestor, is designed to ensure that only clients who state they understand these instruments and the risks involved have the ability to trade them. You may find discussions of the risks associated with options trading below, on the Legal disclosures page and in Covestor’s Informational Brochure on the Forms and agreements page.
  • What are some of the risks of trading options?

    Options trading involves a high degree of risk, is highly speculative, and is not suitable for all investors.

    Trading options may result in the total loss of premiums and transaction costs.

    Options have an inherent leverage because each contract provides derivative exposure to a larger number of the underlying security (usually 100 shares). Each option contract is inexpensive relative to the value of the underlying exposure but a small change in the value of the underlying stock may cause a significantly larger move in the value of the option.

    Options have an ‘asymmetrical payoff’, which means that, as the underlying security price changes, the option may change in price by a different amount. This rate varies depending on whether you are long or short as well as a variety of other factors.

    Options are time-sensitive investments. If you buy an option, you could lose your entire investment even with a correct prediction about the direction and magnitude of a particular price change. For example, the price change does not occur in the relevant time period (i.e. before the option expires).

    Trading halts in the underlying security or other trading conditions (e.g., volatility, system failures) may cause the trading market for one or all options to be unavailable, in which case the holder or writer of an option would not be able to engage in a closing transaction, and would remain obligated until expiration or assignment.

    Options are less tangible than some other investments. Stocks offer certificates, and trade on liquid exchanges, but an option is a book entry-only investment without a paper certificate of ownership. While you are not required to hold an option through expiration, the opportunity to relinquish it may be limited depending on market conditions.

    You should carefully review The Options Clearing Corporation’s ("OCC") disclosure document “Characteristics and Risks of Standardized Options” and Interactive Brokers LLC’s “OCC Risk Disclosure Statement and Acknowledgements.”

    If you are uncomfortable with the level of risk associated with options trading, you should not trade options and should contact Covestor at 1.866.825.3005 to let us know.

  • Can my performance be different from my Portfolio Manager's performance?

    Yes. Covestor will attempt to mirror the options trading in the portfolio a client invests in but may not be able to perfectly replicate the same proportion of options in the client’s account that the Portfolio Manager holds in his account. The performance in the client’s account may be significantly different or worse than that of the Portfolio Manager’s account for several reasons, including but not limited to the following:

    Integer replication:Covestor is unable to transact partial options contracts. This will result in the client’s account holding proportionally less or more options than the Portfolio Manager. As options are leveraged instruments and options positions often have associated stock positions, this position imbalance between the client’s and the Portfolio Manager’s accounts could result in the client account having significantly different performance, leverage, levels of risk and trading costs than the portfolio he invests in.

    Illiquidity:The liquidity of options contracts in a portfolio varies from one day to the next. Depending on when a client chooses to invest in an options portfolio, certain contracts may or may not be easily traded, which may result in the client’s account having different performance, leverage, levels of risk and trading costs than the portfolio he invests in.

    Frequent cash flows:If a client frequently redeems options investments from his account, his account will have proportionally more or less options and associated stock positions than that of the Portfolio Manager, as certain positions are liquidated or additional margin is utilized in order to generate cash for redemptions. Performance drift will also result from frequent cash additions to the options investments in the client’s account.

  • What if I become uncomfortable with the level of risk associated with options trading?

    If you become uncomfortable with options trading in your Covestor account, including the losses or level of risks (including performance drift) associated with options trading, please log into your Covestor account and terminate your investment(s) in any portfolio(s) trading options and remove options trading from your Covestor account settings page. Alternatively, please contact Covestor and we will assist you with your request.