Managing options risk with the Dime Buyback Program

E*TRADE Securities2

08/31/17

It cannot be emphasized enough how important it is to analyze the balance between risk and reward, especially when trading options. When you are long options, you have all of the rights and control over the contract. However, when you are short options you have all of the obligations and a lot of the risk.

Whenever you are short options and you have the opportunity to close those short positions for pennies, it is worthwhile to remove that risk. After all, how much more can you make on a short options position when it’s only trading for a few pennies? Compare that to how much you still have at risk. Unforeseen events and sudden volatility are not rare occurrences, so managing risk can be equally as important as trying to maximize gain.

E*TRADE offers an incentive to traders to close options positions that have big risk but offer very little reward. With the Dime Buyback Program, options traders can buy-to-close short options positions with a premium of 10 cents or less commission free on qualified trades! It is often the commission that prevents options traders from closing those positions; E*TRADE has removed that barrier.

To examine this further, the principal duty of a self-directed investor is to protect their investment capital and maximize the efficient use of that capital.

It is really that basic.

  1. If you have capital, you have the ability to grow your assets and create additional wealth.
  2. If you utilize your capital efficiently, you can put that money to work towards your investment goals.

Many traders sit on short options risk, preferring to wait until they expire (hopefully worthless) rather than pay a commission to close the position.

The E*TRADE Dime Buyback Program gives you an edge by eliminating the commission costs normally charged when closing short “teeny” options. Teeny options are defined as options with a premium of 10 cents or less. At E*TRADE, you will not be charged commission when you buy-to-close teenys.

Closing these options makes sense for several reasons:

  1. Short options writers have obligations and risk regardless how far out of the money the short option may be. With teeny options, the risk vs. reward relationship is WAY out of balance—the short position still has all the risk but with only 10 cents or less the position has very little potential reward remaining.
  2. Because this short option has risk, it continues to consume your buying power, your trading capital. Once you buy-to-close this short option, your buying power will immediately be made available to you, possibly for use in a more favorable reward vs. risk trade. The remaining reward divided by the buying power being consumed is your return on risk percent and a good way to measure how efficient a job you are doing as a trader.
  3. Your buy-to-close trade for options priced at 10 cents or less will be commission free. This is true for a 1 lot or a 1,000 contract trade!

Being an E*TRADE customer you have a valuable edge—use it to maximize your buying power and to eliminate teeny risk!