EFTA01353447.pdf

TRANSACTION COSTS The transaction costs of options investing consist primarily of commissions (which are imposed In open- ing. closing, exercise and assignment transactions), but may also include margin and interest costs in par- ticular transactions. The impact of transaction costs on profitability is often greater for options transactions than for transactions in the underlying interests be- cause these costs are often greater in relation to op- tions premiums than in relation to the prices of underlying interests. Transaction costs are especially significant in option strategies calling for multiple purchases and sales of options, such as spreads and straddles. Transaction costs may be different for trans- actions effected in foreign options markets than for transactions effected in U.S. markets. Readers should always discuss transaction costs with their brokerage firms before engaging In options transactions. MARGIN REQUIREMENTS Writers of options, other than certain covered call option writers and certain writers of cash secured puts (discussed below), must comply with applicable mar- gin requirements. In the stock market, margin refers to buying stock or selling stock short on credit. Margin customers are required to keep securities on deposit with their bro- kerage firms as collateral for their borrowings. But options, unlike stock, cannot be bought on credit under current regulations. In the options market, mar- gin means the cash or securities required to be depos- ited by an option writer with his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest, or in the case of cash-settled op- tions to pay the cash settlement amount, if assigned an exercise. Minimum margin requirements are currently imposed by the Board of Governors of the Federal Reserve System, the options markets and other self- regulatory organizations, and higher margin require- ments may be imposed—either generally or in individ- ual cases—by the various brokerage firms. Uncovered writers may have to meet calls for sub- stantial additional margin in the event of adverse mar- ket movements. Even If a writer has enough equity in his account to avoid a margin call, increased margin requirements on his option positions will make that equity unavailable for other purposes. 55 CONFIDENTIAL - PURSUANT TOCRIEDDRPORW816 P. 6(e) CONFIDENTIAL SDNY_GM_00184000 EFTA01353447