Trading options: the basics, the costs and what a good options broker must do

A standard option on a US share covers 100 shares. Eurex options on European single stocks generally use the same contract size. Index options are not delivered but cash settled, and their multiplier is a fixed money amount per index point that differs between the full-size and mini contracts — read the exchange contract specification before you trade one.

Worked example 1: what a call buyer really pays

The share is at USD 195. You buy a call struck at 200 with six weeks to expiry, quoted at USD 4.20.

• Outlay: 4.20 × 100 = USD 420 plus fees
• Intrinsic value: nil, because 195 is below 200. The whole USD 420 is time value.
• Break-even at expiry: 200 + 4.20 = USD 204.20. The share has to rise 4.7% for you to get your money back.
• Maximum loss: USD 420, or 100% of the stake — and that happens simply if the share goes sideways.

This is the mechanism that leveraged-product advertising leaves out: time value decays towards zero whether or not you are right about direction. For the seller of the same option the position is reversed — they collect the time value but carry a theoretically unlimited risk if the call is not covered by shares.

1. 1Commission per contract — the line that appears in every price list.
2. 2Exchange, clearing and regulatory fees — pass-through items measured in cents, which add up on size.
3. 3The bid-offer spread — the largest line, and the only one that is never invoiced.
4. 4Exercise and assignment — nil at some brokers, a flat charge per event at others.

As of August 2026, taken from the published schedules. On exercise and assignment the spread between brokers is wider than on commission: tastytrade charges USD 5 per event, Fidelity charges nothing. If you expect to be assigned regularly, read that line first.

Worked example 2: a ten-lot, in and out

Opening and closing ten contracts:

Now the spread. The option is quoted 4.15 bid, 4.25 offered. You buy at the offer and sell at the bid:

(4.25 − 4.15) × 100 × 10 = USD 100

So the spread costs eight to ten times the commission — on a liquid option. On a rarely traded strike quoted 3.90 to 4.50 it is (4.50 − 3.90) × 100 × 10 = USD 600. At that point the argument about 65 cents versus a dollar per contract is settled: it does not matter much.

The practical consequence is simple. Trade only underlyings and strikes with tight quotes, and work limit orders at or inside the mid. A market order in an option is an invitation.

Bought options carry no margin — you pay the premium and that is your maximum loss. Sold options are where it gets interesting.

Worked example 3: cash-secured put versus margin put

You sell a put struck at 190 on a share trading at USD 195, 45 days to expiry, premium USD 3.50. Credit received: USD 350.

• Fully cash-secured: you set aside 190 × 100 = USD 19,000. Return if it expires worthless: 350 / 19,000 = 1.84% over 45 days.
• On margin, under the standard US Reg T formula: the premium plus the greater of 20% of the underlying less the out-of-the-money amount, or 10% of the strike. That is 350 + max(20% × 19,500 − 500; 10% × 19,000) = 350 + 3,400 = USD 3,750. Return on margin committed: 9.3% over 45 days.

The second number looks better and is the most common route to a destroyed account. The risk is identical in both cases: if the share falls to 150 you are assigned at 190 and hold 100 shares showing a loss of (190 − 150 − 3.50) × 100 = USD 3,650. In the first case the money is there. In the second the loss is almost as large as the entire margin posted, and a margin call follows.

Size a short option by its assignment value, not by its margin requirement. Internalise that sentence and most of the risk work is done.

Advanced accounts can post considerably less under portfolio margin, or under a risk-based SPAN methodology at Eurex, because offsetting positions are netted. Eligibility is broker- and jurisdiction-specific; portfolio margin in the US carries a minimum equity requirement, and European rules differ.

• American or European style. American options — effectively all US single-stock options — can be exercised at any time. European options, typical for index products, only at expiry. Write an American option and you can be assigned on any business day.
• Dividends. A short call that is in the money is frequently exercised early just before the ex-dividend date, when the dividend exceeds the remaining time value. That is not bad luck; it is the rational behaviour of the counterparty.
• Automatic exercise. In the US, options that finish even marginally in the money are routinely auto-exercised by the clearing house. Carry one uncovered into the weekend and you may find a share position on Monday that the account cannot fund.
• Delivery or cash. Single-stock options deliver shares; index options settle in cash. The difference decides whether you have to finance 100 shares on Monday morning.

A common misunderstanding: the ESMA product interventions cover CFDs and binary options, not exchange-traded options. For CFDs, leverage is capped at 30:1 on major currency pairs down to 2:1 on crypto, with a margin close-out at 50% of minimum required margin, negative balance protection and a standardised risk warning stating the percentage of losing retail accounts (ESMA). None of that automatically applies to a Eurex or OCC option.

The structural difference lies elsewhere. A listed option is cleared through a central counterparty — the OCC in the US, Eurex Clearing in Europe. Your counterparty is the clearing house, not your broker. With a CFD the broker is the counterparty and profits from your loss. That is the strongest argument for using a listed option rather than a CFD on the same share.

Options are also complex instruments under MiFID II. The broker must run an appropriateness assessment and may refuse access. And investor compensation — 90% of the claim up to EUR 20,000 in Germany, GBP 85,000 through the FSCS in the UK — covers the failure of the firm, not your trading losses.

Germany. Gains on derivatives are subject to the 25% flat tax plus solidarity surcharge. The former restriction that limited the offset of derivative losses to EUR 20,000 a year was removed by the Jahressteuergesetz 2024; the current text of section 20(6) EStG no longer contains it. Premiums received for writing options are taxed on receipt, with the closing transaction offset against them. Foreign brokers withhold nothing — you declare it yourself.

Switzerland. Private capital gains are generally tax free. But trading derivatives systematically and on borrowed money risks reclassification as a professional securities dealer, at which point gains become income and social contributions apply. Read the tax administration criteria before you build size.

Austria. 27.5% on derivative gains. With a foreign broker that does not withhold, it goes into your annual return.

Tax law changes, and the treatment of individual structures is disputed in places. Clarify your own position with a qualified adviser before the first trade.

• Native multi-leg order entry. A spread must go in as one order at one net price, not as four separate legs. Legging in manually means paying the spread several times and carrying open risk in between.
• Real-time data. Option quotes without real-time data are useless, because the quote moves with every tick of the underlying. Establish up front what the OPRA subscription or the Eurex feed costs.
• Greeks and implied volatility in the option chain, not in a separate tool.
• Cheap closing. A broker that charges as much to close as to open is penalising risk management. tastytrade charges no commission to close; Fidelity and Schwab waive the contract fee on very cheap buy-to-close orders.
• Transparent margin. The formula must be published, and the platform must show the effect of a planned order before you submit it.
• Assignment and dividend alerts on in-the-money short positions.
• Exchange access that suits you. US options are the most liquid; Eurex is often more practical for European underlyings and for anyone who wants to settle in euros.
• Reporting a tax adviser can use. An annual statement that separates premiums, closing trades, assignments and fees saves hours in the spring.

1. 1Buying cheap far-out-of-the-money options because the stake is small. So is the hit rate.
2. 2Missing the multiplier. "4.20" is 420.
3. 3Trading illiquid strikes. The spread eats several per cent of the stake, round trip.
4. 4Sizing short positions off the margin instead of the assignment value.
5. 5Holding through expiry and being auto-exercised into a share position.
6. 6Ignoring the ex-dividend date while short an in-the-money call.
7. 7Buying before earnings and overlooking that implied volatility collapses afterwards — the option can get cheaper even when the direction was right.
8. 8Using market orders.

1. 1Understand four structures before you fund anything: long call, long put, covered call, cash-secured put. Everything else is built on those.
2. 2Price the round trip first — commission, fees and spread — and compare it against a realistic profit target.
3. 3Size by assignment value. If you do not want to own the 100 shares, do not sell the put.
4. 4Trade liquid underlyings only. Rule of thumb: the spread should be a few per cent of the mid at most.
5. 5Always use limits, at or inside the mid.
6. 6Define the exit before you enter, for both profit and loss, and write the rule down.
7. 7Settle the tax treatment for your residence before the volume grows.
8. 8Start on a demo account or with one contract — tuition should cost you three figures, not five.

Price schedules and margin rules change; check every figure here with the broker before you trade on it.

This article is general information, not investment advice.