Options trading can be an exciting way to potentially enhance your investment portfolio, offering flexibility and leverage. However, it's also a complex area with significant risks. This comprehensive guide will walk you through the process of trading options on Merrill Edge, from setting up your account to executing your first trade.
Ready to dive into the world of options? Let's get started!
Understanding Options Trading on Merrill Edge
Before we get into the "how-to," it's crucial to understand what options are and how they function within the Merrill Edge platform. Merrill Edge provides a robust environment for self-directed investors, including access to a comprehensive options trading platform, MarketPro, and various research tools.
What are Options?
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset (like a stock or ETF) at a specified price (the "strike price") on or before a certain date (the "expiration date").
Call Option: Gives the holder the right to buy the underlying asset. You typically buy calls if you expect the underlying asset's price to go up.
Put Option: Gives the holder the right to sell the underlying asset. You typically buy puts if you expect the underlying asset's price to go down.
Key Terms to Know:
Premium: The price you pay (as a buyer) or receive (as a seller) for the option contract.
Strike Price: The predetermined price at which the underlying asset can be bought or sold.
Expiration Date: The date on which the option contract expires. After this date, the option becomes worthless if not exercised.
In-the-Money (ITM): A call option is ITM if the strike price is below the current market price of the underlying asset. A put option is ITM if the strike price is above the current market price.
Out-of-the-Money (OTM): A call option is OTM if the strike price is above the current market price. A put option is OTM if the strike price is below the current market price.
At-the-Money (ATM): An option is ATM if the strike price is equal to the current market price.
Step 1: Assess Your Readiness and Open a Merrill Edge Account
Before you even think about placing your first options trade, it's paramount to honestly assess your risk tolerance and financial situation. Options trading involves leverage and can lead to significant losses, potentially exceeding your initial investment, especially with certain advanced strategies.
Sub-heading: Understanding Risk and Suitability
Merrill Edge, like all reputable brokers, has strict suitability requirements for options trading. They need to ensure you understand the risks involved. You'll typically be asked about your:
Investment experience: How long have you been investing? What types of investments have you made?
Financial situation: Your income, net worth, and liquid assets.
Investment objectives: Are you looking for growth, income, or speculation?
Risk tolerance: How comfortable are you with the possibility of losing money?
Sub-heading: Opening Your Merrill Edge Account
If you don't already have one, opening a Merrill Edge account is the first concrete step.
Visit the Merrill Edge Website: Navigate to the Merrill Edge official website.
Start the Application: Look for a prominent "Open an Account" or "Get Started" button.
Choose Account Type: For options trading, you'll typically open an Individual or Joint Brokerage Account. You may also consider a retirement account (like an IRA) if permissible for your chosen options strategies (note: custodial accounts have limitations on speculative options).
Provide Personal Information: You'll need to provide details such as your name, address, Social Security number, employment information, and financial details.
Fund Your Account: You can fund your account via bank transfer (ACH), wire transfer, or by mailing a check. Merrill Edge offers unlimited $0 online stock, ETF, and option trades, though options contract fees apply.
Apply for Options Trading Privileges: This is a crucial step. After your account is open and funded, you'll need to specifically apply for options trading privileges. This usually involves answering a questionnaire about your trading experience, financial status, and understanding of options risks. Merrill Edge categorizes options trading into different "levels" based on complexity and risk, and your approval will depend on your responses. Be truthful and thorough in your answers.
Step 2: Understand Merrill Edge's Options Trading Levels
Merrill Edge, like most brokers, has different "options trading levels" that determine which types of options strategies you're permitted to execute. These levels are designed to protect both the investor and the brokerage by ensuring you have the necessary knowledge and financial capacity for more complex strategies.
Sub-heading: Common Options Trading Levels (Illustrative)
While the exact terminology might vary slightly, here's a general overview of options trading levels you might encounter:
Level 1 (Basic): Typically allows for covered calls and protective puts. These are considered less risky as they are often used for income generation or hedging existing stock positions.
Level 2 (Standard): Expands on Level 1 to include buying long calls and long puts (speculating on price movements) and selling cash-secured puts. This level involves higher risk than Level 1.
Level 3 (Spreads): Introduces multi-leg strategies like vertical spreads (e.g., bull call spreads, bear put spreads), iron condors, and butterflies. These strategies are more complex and require a deeper understanding of options mechanics and risk management.
Level 4 (Advanced/Uncovered): Permits uncovered (naked) calls and uncovered puts. These strategies carry unlimited risk in certain scenarios and are generally reserved for highly experienced traders with substantial capital and risk tolerance. Merrill Edge has specific practices for uncovered options, including "Naked Option Stress Analysis (NOSA)."
Remember: You must be approved for the specific level of options trading you wish to pursue. If you're denied, you can often gain more experience and reapply later.
Step 3: Navigate the Merrill Edge Platform for Options Trading
Merrill Edge offers its main web platform and a more advanced platform called Merrill Edge MarketPro. For options trading, especially multi-leg strategies or active trading, MarketPro provides more robust tools and real-time data.
Sub-heading: Accessing the Options Chain
Log In: Log into your Merrill Edge account.
Search for an Asset: Use the search bar to find the stock or ETF you're interested in trading options on.
Navigate to the Options Tab: Once on the asset's quote page, look for an "Options" or "Options Chain" tab.
Explore the Options Chain: The options chain will display a list of available call and put options for various expiration dates and strike prices. You'll see critical information such as:
Strike Price: The price at which the option can be exercised.
Expiration Date: When the option expires.
Bid: The highest price a buyer is willing to pay.
Ask/Offer: The lowest price a seller is willing to accept.
Last Price: The price of the last executed trade.
Volume: Number of contracts traded for that specific option today.
Open Interest: Total number of outstanding contracts for that specific option.
Implied Volatility: A measure of the market's expectation of future price swings.
Sub-heading: Utilizing Merrill Edge MarketPro (Optional but Recommended for Active Traders)
Merrill Edge MarketPro offers a more dynamic and customizable environment for options traders.
Launch MarketPro: If you meet the criteria (often based on account balance or trading activity), you can launch MarketPro from your main Merrill Edge account.
Customizable Workspaces: MarketPro allows you to create custom workspaces with various windows for:
Streaming Watchlists: Keep an eye on your favorite stocks and options.
Interactive Charting: Analyze price trends and apply technical indicators.
Real-time Option Chain: With advanced filtering and customization options.
Trade Ticket: Quickly enter orders.
News and Research: Integrated insights from Bank of America Merrill Lynch Global Research, Morningstar, and CFRA.
OptionsPlay®: A valuable tool that helps evaluate investment strategies and analyze trades with simulators.
Level II Data: For deeper insights into market depth (may require higher account balances).
Familiarize yourself with the layout and features of the platform before placing live trades. Many brokers offer paper trading accounts or tutorials to help you practice.
Step 4: Research and Select Your Options Strategy
This is where your investment thesis meets the world of options. There are numerous options strategies, each suited for different market views (bullish, bearish, neutral) and risk appetites.
Sub-heading: Basic Options Strategies (Good Starting Points)
Buying Calls (Long Call): Bullish strategy. You profit if the underlying stock price rises significantly above the strike price before expiration. Risk is limited to the premium paid.
Buying Puts (Long Put): Bearish strategy. You profit if the underlying stock price falls significantly below the strike price before expiration. Risk is limited to the premium paid.
Selling Covered Calls (Buy-Write): Neutral to slightly bullish strategy. You own 100 shares of stock and sell a call option against it. You collect the premium, which provides some income and slight downside protection. Your upside is capped at the strike price plus premium.
Selling Cash-Secured Puts: Neutral to slightly bullish strategy. You sell a put option and set aside enough cash to buy the stock if it drops to the strike price. You collect the premium. Your goal might be to acquire the stock at a lower price or simply collect the premium if the stock stays above the strike.
Sub-heading: Advanced Strategies (Requiring Deeper Understanding)
Vertical Spreads (Bull Call Spread, Bear Put Spread): Involve buying and selling options of the same type (calls or puts) with the same expiration but different strike prices. They limit both profit and loss, reducing risk compared to outright long/short options.
Iron Condors/Butterflies: Neutral strategies that involve multiple legs and aim to profit from an underlying asset staying within a specific price range. Highly complex and require precise execution and risk management.
Merrill Edge provides educational resources and tools like OptionsPlay® to help you understand and evaluate different strategies. Take advantage of these!
Step 5: Place Your Options Trade
Once you've decided on your strategy and selected the specific option contract(s), it's time to place the order.
Sub-heading: Using the Trade Ticket
Access the Trade Ticket: From the options chain or MarketPro, you can typically right-click on an option or click a "Trade" button to open the trade ticket.
Select Action: Choose "Buy to Open" (if you're buying a new option position) or "Sell to Open" (if you're selling a new option position).
Enter Symbol: The underlying asset symbol should auto-populate.
Select Option Type: Choose "Call" or "Put."
Select Expiration and Strike Price: These will also likely auto-populate from your selection on the options chain.
Specify Quantity: Options contracts typically represent 100 shares of the underlying asset. So, if you want to control 100 shares, you'd enter "1" contract.
Choose Order Type:
Market Order: Executes immediately at the best available price. Not recommended for options due to potential price volatility.
Limit Order: Allows you to specify the maximum price you're willing to pay (for buying) or the minimum price you're willing to receive (for selling). Highly recommended for options trading.
Stop Orders / Stop-Limit Orders: Can be used for risk management, though their effectiveness with options can be limited due to gapping and volatility.
Time in Force:
Day: The order is active only for the current trading day.
Good 'Til Canceled (GTC): The order remains active until it's filled or you cancel it (typically up to 60 days).
Review and Confirm: Carefully review all details of your order before submitting. This includes the symbol, call/put, expiration, strike, quantity, price, and order type.
Submit Order: Click "Place Order" or "Submit Trade."
Sub-heading: Placing Multi-Leg Orders (Spreads)
For multi-leg strategies, Merrill Edge's trade ticket will allow you to add multiple legs to a single order. This is crucial for ensuring the legs are executed together as part of a single strategy.
Select "Strategy" on the Trade Ticket: Instead of a single buy/sell, you'll choose a specific options strategy (e.g., "Vertical Call Spread").
Input Details for Each Leg: The platform will guide you to enter the strike price, expiration, and buy/sell action for each leg of the spread.
Review Net Premium/Debit/Credit: The trade ticket will show the net effect of the spread (a debit if you're paying to open, a credit if you're receiving money to open).
Execute as a Single Order: This helps ensure that the spread is executed correctly and that you don't end up with unintended single legs.
Step 6: Monitor and Manage Your Options Positions
Options are time-decaying assets, meaning their value erodes as they approach expiration. Active monitoring and management are essential.
Sub-heading: Tracking Your Positions
Portfolio View: Your Merrill Edge account dashboard will show your open options positions, their current value, and profit/loss.
Real-time Quotes: Use MarketPro or the web platform to get real-time quotes for your options and the underlying asset.
Alerts: Set up alerts for price movements of the underlying asset or your options contracts to stay informed.
Sub-heading: Closing an Options Position
To close an options position, you generally execute an opposite transaction:
To close a long call/put: "Sell to Close" the same option contract.
To close a short call/put: "Buy to Close" the same option contract.
Roll an Option: Instead of closing, you might choose to "roll" an option. This involves simultaneously closing your current option position and opening a new one with a different strike price or expiration date. This can be used to extend your trade, take profits, or adjust your strategy.
Exercise or Assignment: If your option is in-the-money at expiration (or sometimes before), it may be automatically exercised (for long options) or assigned (for short options). Be aware of exercise and assignment procedures and potential cash flow implications.
Step 7: Understand Fees and Tax Implications
Trading options comes with specific costs and tax considerations.
Sub-heading: Merrill Edge Options Fees
Per-Contract Fee: Merrill Edge charges a per-contract fee for options trades (e.g., $0.65 per contract).
Multi-Leg Orders: Multi-leg options orders are typically charged one base commission per order, plus a per-contract charge.
Assignment/Exercise Fees: There might be fees associated with exercising a long option or being assigned on a short option.
Regulatory Fees: Small regulatory fees may also apply.
Always review Merrill Edge's current fee schedule on their website for the most up-to-date information.
Sub-heading: Tax Implications
Options trading has complex tax implications. Profits from options can be taxed as short-term or long-term capital gains depending on your holding period. Certain strategies, like covered calls, might have specific tax treatments. It's highly recommended to consult with a qualified tax advisor to understand how options trading will impact your personal tax situation.
Conclusion
Trading options on Merrill Edge can be a powerful tool for sophisticated investors. By following these steps – from understanding the basics and setting up your account to researching strategies, placing trades, and managing your positions – you can navigate the options market with greater confidence. However, always remember the inherent risks. Start small, educate yourself continuously, and never invest more than you can afford to lose.
10 Related FAQ Questions
How to open a Merrill Edge options trading account?
You open a standard Merrill Edge brokerage account first, and then apply for options trading privileges within that account by completing a separate application that assesses your experience, financial situation, and risk tolerance.
How to get approved for higher options trading levels on Merrill Edge?
Approval for higher options trading levels typically requires demonstrating increased trading experience, a solid understanding of options risks, and a stronger financial profile (e.g., higher net worth, liquid assets). You may need to gain experience with simpler strategies before being approved for more complex ones.
How to find the options chain on Merrill Edge?
After logging into your Merrill Edge account, search for the underlying stock or ETF you're interested in. On the security's quote page, you'll find a dedicated "Options" or "Options Chain" tab where you can view available contracts.
How to place a multi-leg options order on Merrill Edge?
On the Merrill Edge trade ticket, select the "Strategy" option instead of a single buy/sell. This will allow you to build and execute multi-leg strategies like spreads, ensuring all components are placed as a single order.
How to close an options position on Merrill Edge?
To close a long option, you place a "Sell to Close" order for the same contract. To close a short option, you place a "Buy to Close" order for the same contract. You can typically do this from your portfolio holdings or the options chain.
How to use Merrill Edge MarketPro for options trading?
Merrill Edge MarketPro is an advanced desktop platform offering real-time data, customizable workspaces, advanced charting, and integrated research tools specifically beneficial for active options traders. You can launch it from your main Merrill Edge account if you meet the eligibility criteria.
How to manage risk when trading options on Merrill Edge?
Managing risk involves understanding the maximum potential loss of your chosen strategy, using limit orders, setting stop-loss orders (though be aware of their limitations with options), diversifying your portfolio, and only risking capital you can afford to lose. Never over-leverage yourself.
How to roll an options position on Merrill Edge?
Rolling an option involves simultaneously closing your current option position and opening a new one with a different strike price or expiration date. This functionality is typically available within the trade ticket or options chain, often labeled as "Roll" or "Close and Reopen."
How to understand Merrill Edge options trading fees?
Merrill Edge charges a per-contract fee for options trades (e.g., $0.65 per contract). Multi-leg orders may have a base commission plus per-contract fees. It's essential to review their official fee schedule for current and complete information.
How to learn more about options strategies available on Merrill Edge?
Merrill Edge provides educational resources, articles, and tools like OptionsPlay® on their platform. You can also access research from Bank of America Merrill Lynch, Morningstar, and CFRA. Independent financial education resources are also highly recommended.
