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When you buy an option, the cost of that option is called a premium. Since you're opening the position by making a purchase, you start at a net debit. If the option expires worthless, you won't recover the premium you paid for the contract. And, if you either exercise or sell the contract, you must subtract the cost of the premium from your return to calculate your net profit or loss.
Commissions and other trading costs also apply on each transaction. If you sell a contract, you receive the premium and start out at a net credit. If the option expires, the premium becomes your profit and the buyer's loss.
If the option is exercised, you still keep the premium, but are obligated to buy or sell the underlying from the buyer. Contract prices are not fixed, but fluctuate based on a number of factors: As a result, the premium you pay today will likely be higher or lower than the premium another investor paid yesterday or will pay tomorrow. Options involve risk and are not suitable for all investors. All option accounts require prior approval by Scottrade.
Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request. Any specific securities, or types of securities, used as examples are for demonstration purposes only.
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