Prior to buying or selling an option, investors must read a copy of the Characteristics & Risks of Standardized Options, also known as the options disclosure document (ODD). It explains the characteristics and risks of exchange traded options.
Special Statement for Uncovered Option Writes
Special risks are involved with uncovered options writing that may expose the investor to potential losses. This type of strategy may not be suitable for all customers that have been approved for options trading. Losses that may occur could be significant and must be understood before employing this strategy. Uncovered put writing is limited to the price of the security dropping to zero. The investor should be aware of such potential loss. Uncovered call writing has unlimited loss potential. This strategy is extremely risky, and the extent of possible losses should be understood by the investor.
The use of uncovered option writing should be limited to those investors that are suitable to this investment. To employ this strategy, the investor must have substantial financial capability in which to withstand significant loss. Market movements may require the investor to meet margin calls which would require more funds or securities in the account to meet the margin requirements. Absent the deposit of funds or securities, the investors assets in the account may be liquidated to meet the margin requirements. In addition, this type of option writing should be consistent with the investor's objectives.
Option writers are subject to liquidity in the market where open contracts may not be closed as directed, which would subject the investor to possible assignment. If assigned, the investor may have to fulfill the terms of the contract by either purchasing a security or delivering the underlying security. The investor should be aware that regardless of the liquidity of the market, he/she is always subject to possible assignment which may occur at a disadvantaged market conditions that may result in substantial losses.
Other risks might be associated with writing uncovered options. You are expected to have read and understood Characteristics and Risks of Standardized Options, in particular the chapter entitled "Risk of Buying and Writing Options".