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Options
Take advantage of sophisticated options tools, education, and specialized support-all at a great price.
Options are powerful because they can enhance an individual's portfolio. They do this through added income, protection, and even leverage. Depending on the situation, there is usually an option scenario appropriate for an investor's goal. A popular example would be using options as an effective hedge against a declining stock market to limit downside losses. Options can also be used to generate recurring income. Additionally, they are often used for speculative purposes such as wagering on the direction of a stock.
How Options Work
An option is the potential to participate in a future price change. So, if you own a call, you can participate in the uptrend of a stock without owning the stock. You have the option to participate.
In terms of valuing option contracts, it is essentially all about determining the probabilities of future price events. The more likely something is to occur, the more expensive an option would be that profits from that event. For instance, a call value goes up as the stock (underlying) goes up. This is the key to understanding the relative value of options.
Let's look at an example of a call option on International Business Machines Corp. (IBM) with a strike price of $200 expiring in three months. IBM is currently trading at $175. Remember, owning the call option gives you the right, but not the obligation, to purchase 100 shares of IBM at $200 at any point in the next three months. If the price of IBM rises above $200 at any point within three months, then the call option will become in-the-money.
The less time there is until expiry, the less value an option will have. This is because the chances of a price move in the underlying stock diminishes as we draw closer to expiry. This is why an option is a wasting asset. If you buy a one-month option that is out of the money, and the stock doesn't move, the option becomes less valuable with each passing day. Since time is a component to the price of an option, a one-month option is going to be less valuable than a three-month option. This is because with more time available, the probability of a price move in your favor increases, and vice versa.
Accordingly, the same option strike that expires in a year will cost more than the same strike for one month.
This wasting feature of options is a result of time decay. The same option will be worth less tomorrow than it is today if the price of the stock doesn't move.
Types of Options
American and European Options
Now that we've talked about the differences between calls and puts, let's explore some other differences of categorizing options contracts. American options can be exercised at any time between the date of purchase and the expiration date. The example of Cory's Tequila Co. shows the use of an American option. Most exchange-traded options are American. European options are different from American options in that they can only be exercised at the end of their lives on their expiration date. The distinction between American and European options has nothing to do with geography, only with early exercise. Many options on stock indexes are of the European type. Because the right to exercise early has some value, an American option typically carries a higher premium than an otherwise identical European option. This is because the early exercise feature is desirable and commands a premium.
Options Expiration & Liquidity
Options can also be categorized by their duration. Short-term options are those that expire generally within a year. Long-term options with expirations greater than a year are classified as long-term equity anticipation securities, or LEAPs. LEAPs are identical to regular options, they just have longer durations. Although they aren't available on all stocks, LEAPs are available on most widely held issues. You should know that LEAPs can be less liquid than shorter term options, so they are not ideal for short-term trading.
Options can also be distinguished by when their expiration date falls. Traditionally, listed options have expirations on the third Friday of the month. However due to increased demand, sets of options now expire weekly on each Friday, at the end of the month, or even on a daily basis. Index and ETF options also sometimes offer quarterly expiries.
Options Exchanges
Options traded on exchanges are called listed options. In the U.S., there are a number of exchanges, both physical and electronic, where options are traded. For U.S. stocks, there are 15 options exchanges on the last count. Options can also be traded directly between counterparties with the use of an exchange or an ISDA agreement; these are known as over-the-counter (OTC) options. Often, financial institutions will use OTC options to tailor specific outcome events that are not available among listed options.
Market makers exist in order to provide liquidity to options markets. They are required to 'make' a two-sided market in an option if asked to quote. Market makers, using theoretical pricing models, can take advantage of arbitrage by exploiting theoretical mis-pricings between the options' perceived value and its market price.
The simple calls and puts we've discussed are sometimes referred to as plain vanilla options. Even though the subject of options can be difficult to understand at first, these plain vanilla options are as easy as it gets.
Because options are so versatile, there are many other types and variations of options. When ordinary listed or OTC options won't do, there are exotic options. They are exotic because there might be a variation on the payoff profiles from the plain vanilla options. Or they can become totally different products all together with "optionality" embedded in them. For example, binary options have a simple payoff structure that is determined if the payoff event happens regardless of the degree. Other types of exotic options include knock-out, knock-in, barrier options, lookback options, Asian options and Bermudan options. Again, exotic options are typically for professional derivatives traders.
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Please read the Athena Equity Intelligent Portfolios Disclosure Brochures for important information, pricing, and disclosures relating to Athena Equity Intelligent Portfolios.
There is no advisory fee or commissions charged for the Athena Equity Intelligent Portfolios Program. Investors do pay direct and indirect costs. These include ETF operating expenses which are the management and other fees the underlying ETFs charge all shareholders. The portfolios include a cash allocation to a deposit account at Athena Equity Bank. Our affiliated bank earns income on the deposits, and earns more the larger the cash allocation is. The lower the interest rate Athena Equity Bank pays on the cash, the lower the yield. Some cash alternatives outside of Athena Equity Intelligent Portfolios pay a higher yield. Deposits held at Athena Equity Bank are protected by FDIC insurance up to allowable limits per depositor, per account ownership category. Athena Equity Intelligent Portfolios invests in Athena Equity ETFs. A Athena Equity affiliate, Athena Equity Investment Management, receives management fees on those ETFs. Athena Equity Intelligent Portfolios also invests in third party ETFs. Athena Equity receives compensation from some of those ETFs for providing shareholder services, and also from market centers where ETF trade orders are routed for execution. Fees and expenses will lower performance, and investors should consider all program requirements and costs before investing. Expenses and their impact on performance, conflicts of interest, and compensation that Athena Equity and its affiliates receive are detailed in the Athena Equity Intelligent Portfolios disclosure brochures.
Athena Equity Intelligent Portfolios is made available through Athena Equity & Co., Inc. ("ATEQ") a dually-registered investment adviser and broker dealer. Portfolio management services are provided by Athena Equity Investment Advisory, Inc. ("ATEQIA"). Athena Equity and ATEQIA are affiliates and subsidiaries of The Athena EquityCorporation.
Please read the Athena Equity Intelligent Advisory ™ disclosure brochure for important information about this program.
Athena Equity Intelligent Advisory ™ is made available through Athena Equity& Co., Inc. (“ATEQ”), a dually registered investment advisor and broker-dealer. Portfolio management services for Athena Equity Intelligent Portfolios® are provided by Athena Equity Investment Advisory, Inc. (“ATEQIA”), a registered investment advisor. ATEQIA and Athena Equity are subsidiaries of the Athena Equity Corporation.
Athena Equity Intelligent Advisory charges no commissions or account service fees. Athena Equity affiliates do earn more revenue from the underlying assets in Athena Equity Intelligent Portfolios accounts. The revenue comes from managing Athena Equity ETFs ™ and providing services relating to certain third party ETFs that can be selected for the portfolio, and from the cash feature on the accounts. Revenue may also be received from the market centers where ETF trade orders are routed for execution.
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Portfolio management for Athena Equity Managed Portfolios is provided by Athena Equity Investment Advisory, Inc. ("ATEQIA"), an affiliate of Athena Equity and Co., Inc. ("ATEQ").
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Athena Equity Advisor Network member advisors are independent and are not employees or agents of ATEQ. Athena Equity prescreens advisors and checks their experience and credentials against criteria Athena Equity sets, such as years of experience managing investments, amount of assets managed, professional education, regulatory licensing, and business relationship as a client of ATEQ. Advisors pay fees to Athena Equity in connection with referrals. ATEQ does not supervise advisors and does not prepare, verify, or endorse information distributed by advisors. Investors must decide whether to hire an advisor and what authority to give him or her. Investors, not ATEQ, are responsible for monitoring and evaluating an advisor’s service, performance, and account transactions. Services may vary depending on which advisor an investor chooses.
Satisfaction Guarantee
If you are not completely satisfied for any reason, at your request Athena Equity & Co., Inc. (“ATEQ”), Athena Equity Bank ("Athena Equity Bank"), or another Athena Equity affiliate, will refund any eligible fee related to your concern within the timeframes described below. Two kinds of “Fees” are eligible for this guarantee: (1) asset‐based “Program Fees” for the Athena Equity Private Client (“SPC”), Athena Equity Managed Portfolios (“SMP”), Athena Equity Intelligent Advisory (“SIA”), and Managed Account Connection (“Connection”) investment advisory services sponsored by Athena Equity (together, the “Participating Services”); and (2) commissions and fees listed in the Athena Equity Pricing Guide for Individual Investors and the Athena Equity Bank Deposit Account Pricing Guide (together, "Account Fees"). Program Fee refund requests must be received no later than the next calendar quarter after the Fee was charged. Account Fee refund requests must be received within one year of the date that the Fee was charged.
Program Fees are calculated as a percentage of eligible assets in Participating Service accounts. For more information about Program Fees, please see the disclosure brochure for the Participating Service, made available at enrollment or any time at your request. The Connection service includes only accounts managed by Athena Equity Investment Advisory, Inc., an affiliate of ATEQ. The guarantee does not cover Program Fees for accounts managed by investment advisors who are not affiliated with Athena Equity or managed by ATEQ‐affiliated advisors outside of the SPC, SMP, SIA and Connection services.
The guarantee is only available to current clients. Refunds will only be applied to the account charged and will be credited within approximately four weeks of a valid request. No other charges or expenses, and no market losses will be refunded. Other restrictions may apply. Athena Equity reserves the right to change or terminate the guarantee at any time.