Direct Access Trading – Terra Nova Online Trading Platforms

Turbo Options

The Turbo Options screen has the same order entry box as the equity screen. Certain steps are necessary to insure your order is placed right the first time.

Up to three options routes are available to route options orders:

TNOP

MLXOPT

MANOPT

All of these routes have access to the options exchanges listed below.

Under the Options box, located on the right-hand side of the order entry screen, the "Pref." box has to be checked, and a particular options exchange has to be selected and shown in the "Pref." box. In order to select an exchange, you must click on the individual exchange in the regional view, located to the left of the order entry box. Please note, clicking on the exchange will populate that exchange in the "Pref." box and the current bid or offer shown by that exchange. The "Pref." box and regional view are highlighted below.

Exchange	Symbol
International Securities Exchange	ISE
Chicago Board of Trade	CBO
American Stock Exchange	ASE
Philadelphia Stock Exchange	PHS
Pacific Stock Exchange	PSE
Boston Options Exchange	BOX

Turbo Options has been developed to allow buy to open and sell to close orders. Notice the Open/Close box is set on auto, which will not allow you to write "calls" or "puts". If you need to write "calls" or "puts", please contact our Trade Desk at 1-800-452-6294.

Turbo Options provides the last, bid, ask, and current volume for each option. Other fields may be selected to view – right click on the Turbo options screen and select Setup. By clicking on the individual option, the regional view will populate with the current bid and ask for each exchange that trades the option. Each expiration month is listed separately. To view additional strike prices, click on the tab for that specific month. To view an option’s symbol, click on the option, and it will populate in the order entry box with the symbol field already filled in.

Exercising Options and Options Assignment

How Do You Exercise an Option?

You can exercise your options by calling our Trade Desk before the exercise cutoff times:

At 4:30 PM ET on the third Friday of the month of expiration for listed equity and broad based index options.

At 4:30 PM ET on the Thursday before the third Friday of the month of expiration for selected index options.

E-mail Instructions Are NOT Acceptable.

Please refer to http://www.cboe.com/TradTool/Symbols/SymbolDirectory.asp for a complete list of index options and expiration times.

When you own an option that is about to expire in-the-money, our clearing firm may, at its sole discretion and without notification to you, exercise any index options that are $.01 or more in-the-money and any equity options $.05 or more in-the-money. Whether or not your equity options are $.05 in-the-money, you should always contact the Terra Nova Trade Desk to ensure that your options will be exercised should you wish to exercise your options. If the option is not in the money and you do not exercise the contract by the expiration date, the option will be worthless.

To exercise your options, Terra Nova generally requires that your account contain buying power equal to or greater than the required margin of the underlying securities. Terra Nova may, however, carry out the exercise even if your account does not contain full funds, in which case you are still responsible for the resulting transaction and for submitting funds that meet stated requirements.

If there are insufficient funds in your account to exercise your long equity options, Terra Nova, at its discretion, may liquidate long option positions on the last trading day preceding expiration.

If you choose to exercise a call, you must have the cash or buying power to purchase the stock unless you place a market sell order with a broker when you are exercising the option.

If you exercise an option or your option gets exercised, there will be a charge of $25.00 per assignment.

What is Assignment?

When an option you've written gets exercised, you are said to have been "assigned" the option. If you are assigned, you must fulfill your obligation as an option writer either by buying or selling shares at the strike price stipulated in the option contract. Our clearing firm, Terra Nova Financial, LLC, receives assignment instructions from the OCC (Options Clearing Corporation) and randomly assigns individual brokerage accounts.

What Happens When an Option You've Written Gets Exercised?

If you've been assigned Terra Nova will notify you as follows:

You will receive an email message informing you that you've been assigned. This message will identify the specific contract.

Once your account has been assigned, you will be able to view the assignment details in RealTick®. The day after the assignment, the Comprehensive Report will the results of the assignment.

There are two types of approaches to treating option expirations in use today: The American Exercise Style and the European Exercise Style. The American Style allows option owners to exercise their options at any time up to and including the last business day before expiration. The European Style on the other hand allows the owner to exercise the option only during a specified period prior to its expiration. Usually, that period is between one and five days.

Most options are governed by the American Style of expiration but there are occasional examples of options governed by the European Style. Please call a Terra Nova Tradedesk representative to determine the style that governs your option contract, should you wish to exercise your option position.

Exercise Deadline When You Call Terra Nova.

In order for Terra Nova to take a verbal request to exercise your option, you must call us by 4:30 PM ET on the last trading day before expiration. Options expire on the Saturday following the third Friday of the month. Therefore, the last trading day for options is the third Friday of the month.

Options are derivative securities, meaning that their value is derived from other underlying securities (stocks, futures, etc). While they can be extremely volatile, they can also be extremely versatile, helping traders capitalize on the market and leverage current positions. Options trade in contracts with specific terms. They give buyers the right to buy or sell a particular security at a fixed (strike) price, on or before a specific date. One stock option usually represents rights on 100 shares of underlying stock, and they typically expire on the third Friday of each month. For example, a ABC Oct 30 Call gives the buyer the right to purchase 100 shares of ABC at $30 up until the third Friday in October.

Long Calls (Options Strategies)

A call option gives the buyer the right to purchase shares of an underlying security. Purchasing calls is a bullish strategy; the buyer expects that the price of the underlying stock is going to increase. Hopefully, as the price of the underlying security increases, so will the value of the option. While the profit potential for a long call is unlimited, potential loss is fixed at the option’s purchase price. If the underlying stock price falls to zero, the option will simply expire worthless.

The strike price of a call, relative to the price of its underlying stock, determines whether it is "in-the-money" or not. If the current stock price is above a call’s strike (plus premium), it is considered in-the-money; the holder can exercise the call and purchase stock shares below current market price. If the stock price is below the call’s strike, the option is out-of-the-money. No one will exercise a ABC 30 call when ABC is trading at $20, or pay much for the option. Keep in mind that any premium and commissions paid for options must also be considered when determining whether a position is profitable or not.

The three main factors that affect the price of a call option are:

The underlying security price in relation to the strike price
The time remaining until the option contract expires
The volatility of the underlying security

Long calls that are already in the money command a higher price than those whose strike is well above current market price. Also, as the calendar date approaches the expiration date of an option (the third Friday of each month), the time value of the contract will decrease. Finally, the more fluctuation there is in a stock’s price, the more likely it is that its options will fluctuate; the less a security fluctuates, the less movement there will be in the price of its calls.

In-the-money option owners have the choice of selling their calls or exercising them. In some cases, if a call is far enough in the money (3/4 of a point or more on expiration day), it will be exercised automatically. Selling a long call (selling to close) renders one flat in the position. Owners can also exercise their options and take possession of the stock at their strike price (note that funds must be on hand to cover the full purchase amount of the stock). This strategy might prove beneficial if the owner wishes to hold onto the shares, expecting the stock price to increase. The owner may also have the shares delivered into his/her account and sold immediately. Some traders sell in-the-money call option contracts, and then rollover the profit into another call option contract at a higher strike price. Of course, this trader would still have to feel bullish about the underlying security.

Long Puts (Options Strategies)

A put option gives the buyer the right to sell shares of an underlying security. Buying puts is a bearish strategy; the buyer expects that the underlying stock’s price is going to drop. As the price of the underlying security decreases, the value of the put will most likely increase. The potential profit on long puts is limited (since the stock can only drop to zero), and the potential loss is fixed at the option’s purchase price.

The strike price of a put, relative to the price of its underlying stock, determines whether it is in-the-money or not. If the current stock price is below the put’s strike, it is considered in-the-money. If the strike is below current market, the put is out-of-the-money.

The three main factors that affect the price of a put option are:

The underlying security price in relation to the strike price
The time remaining until the option contract expires
The volatility of the underlying security

As the underlying security price decreases, the value of the put will increase. If the underlying security price increases, the price of the put option will decrease. As the current calendar date approaches the expiration date, the price of the option contract will decrease. Finally, the more fluctuation there is in a stock’s price, the more likely it is that its puts will trade at a premium; the less a security fluctuates, the less movement there will be in the price of its puts.

Put holders have the option of selling their puts or exercising them. Selling a long put (selling to close) makes the position flat. Owners can exercise their puts if they are also long the underlying stock. They "put" their shares to the market, receiving payment at the strike price. Traders who are long a security sometimes employ this strategy, utilizing puts as a hedge. In some cases, if a put is far enough in the money (3/4 of a point or more on expiration day), it will be exercised automatically.

Writing Covered Calls (Options Strategies)

Writing covered calls is the sale of a call while holding shares of the underlying stock. The writer of a covered call is bullish on the long term prospects of the security but bearish on the short term prospects. The covered is also used to generate income on the stock by collecting premiums on the sale of out of the money calls The call is not considered short since the underlying security serves as collateral, and will be tendered should the option be exercised. If a covered call writer wishes to retain the stock, the calls can be bought back. (Provided this is done prior to exercise.)

Example:

The above example does not include commission charges that could significantly decrease the above profits or increase the loss.

Complex Option Strategies

Several option strategies involving simultaneous trades of two or more options do exist. These are employed by experienced options traders for profit or to hedge on specific market situations. You must be approved to use these strategies.

Call Debit Spread

A call debit spread consists of the purchase of a call and the sale of another call at a lower strike price. A very aggressive spread would establish an out-of-the-money call for each leg of the spread. A less aggressive strategy would establish the lower call in the money and the higher call out-of-the-money. The least aggressive strategy would establish both legs of the spread in the money.

Example:

A trader buys an ABC July 55 call for 3.50 and sells an ABC July 60 call for 1.75. ABC is currently trading at 56. This trade results in a debit of 1.75. If ABC closes above 56.75 at expiration, the spread is in the money, since the debit was 1.75. The maximum profit occurs when ABC closes at 60 upon expiration; the long call is worth 5 and the short call expires worthless, realizing a profit of 1.75 on the sale of the call. The above example does not include commission charges that could significantly decrease the above profits or increase the loss.

The maximum profit = the higher strike price.

The lower strike price – net debit of the spread.

The maximum loss = the net debit of the spread.

The breakeven point = lower strike price + the net debit of the spread.

Call Credit Spread

This strategy involves the purchase of a call and the sale of another call at a lower strike price. The net amount of the two premiums results in a credit. The strategy behind this spread is for both options to expire worthless. It becomes profitable if the short call’s (the one that is sold) strike is above the stock price upon expiration.

Example:

A trader purchases a DEF July 100 call at 1.75 and sells a DEF July 95 call at 3.50. The net credit of the two premiums is 1.75, which is also the maximum profit on this spread. The maximum loss in this strategy is the difference between the two strike prices, less the net credit received. Overall, this strategy is very aggressive, since the short call has a lower strike price than the long call. The above example does not include commission charges that could significantly decrease the above profits or increase the loss.

The maximum profit = the initial credit.

The maximum loss = higher strike price – lower strike price – net credit.

The breakeven point = lower strike price + initial credit.

Long Straddle

This strategy is generally used when a trader expects strong volatility in the underlying security but is not sure which direction it will go. The long straddle is a simultaneous purchase of a long call and a long put. Both options are on the same security, and have the same strike price and expiration date.

Example:

A trader purchases a JKL November 30 call at 3 and a JKL November 30 put at 2.50. This results in a net debit of 5.50. If JKL closes above 35.50, the call will be profitable. If JKL closes below 24.50 at expiration, the put will be profitable. Maximum loss occurs if JKL closes at 30, because the options would expire worthless and both premiums would be lost. The above example does not include commission charges that could significantly decrease the above profits or increase the loss.

The maximum profit = Unlimited.

The maximum loss = the initial debit.

The breakeven points = exercise price plus and minus the combined premium.

Long Strangle

The long strangle is a simultaneous purchase of a long call and a long put that have the same expiration date on the same underlying security. However, the strike prices are not the same.

Example:

A trader buys a JKL November 40 call and a JKL November 30 put. Both options carry a premium of $1 for a total cost of $2. The underlying security price is $35. Both options are out of the money and will require a greater amount of volatility than the Long Straddle for either of the strike prices to be surpassed. If JKL closes at $35 upon expiration, maximum loss (the total amount of the premiums) occurs. In order for this strategy to be profitable, JKL must close below 28 or above 42 at expiration. The above example does not include commission charges that could significantly decrease the above profits or increase the loss.

The maximum profit = Unlimited.

The maximum loss = the initial premiums.

The breakeven points = exercise price plus and minus the combined premium.

Long Butterfly

Essentially, the long butterfly is a simultaneous purchase of a bull call spread and a bear call spread. One call is bought at the lowest strike price and one call is bought at the highest strike price. Two calls are sold at a middle strike price. The Long Butterfly can be described as "buying the wings and selling the middle."

Example:

A trader buys one August ABC 80 call at $2 and one August 60 call at $6.50, and sells two August ABC 70 calls at $3.50. The net debit is $150. Ideally, the current price of the underlying security should be close to the middle strike price (the short calls). The above example does not include commission charges that could significantly decrease the above profits or increase the loss.

Maximum risk = the net debit of the butterfly.

Maximum profit = the distance between the strikes – the net debit.

Downside breakeven point = lowest strike price plus the net debit.

Upside breakeven point = highest strike price less the net debit.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document are available from Terra Nova Financial, LLC, 100 S. Wacker Drive, Suite 1550, Chicago, IL 60606. A prospectus, which discusses the role of The Options Clearing Corporation, is also available on request for no charge. Contact The Options Clearing Corporation, 440 S. LaSalle Street, 24th Floor, Chicago, IL 60605. The documents available discuss exchange-traded options issued by The Options Clearing Corporation and are intended for educational purposes. No statement in the documents should be construed as a recommendation to buy or sell a security or to provide investment advice.

Options are not suitable for all investors and you must balance the opportunities of options trading with the corresponding risks involved. You should discuss tax treatment of the possible options strategies with your tax advisers prior to undertaking such transactions. Exercise and/or closing transactions are subject to commission charges. Interest charges are incurred where the underlying securities are purchased on margin.