Dear Steve:

Thanks so much for your excellent writings. I find it extremely unfair that brokerages charge separate commissions when options get assigned by partial allotments. If I wrote out 10 contracts, in theory it could be assigned 10 times and I'd have to pay 10 commissions. Is this practice legal, legitimate or ethical?

-- S.W.

Unfortunately, separate charges incurred through partial assignments are legal, legitimate and (admittedly, I didn't poll every brokerage firm out there) seem to be a uniformly accepted industry practice. But the good news is that you should rarely experience the pain of multiple commission costs on a single position.

While most equity options are American-style, meaning they can be exercised at any time before expiration, less then 2% of all assignments occur more than two days prior to expiration. And of those that do, a good portion are due to dividend arbitrage , meaning they are one-day events.

A distinction needs to be made between assignments done in a single day (but in multiple-lot fashion) and a series of partial assignments that take place over several days. Even though it's not uncommon for an option assignment -- even on a 10-contract position -- to be broken down into several small pieces (for more on the random nature of the option assignment allocation process, click here ), as long as they all occur on the same day, only one single commission fee will be charged.

According to Ned Bennett, CEO of online brokerage firm OptionsXpress, "the nature and economics of the assignment and trade-clearing process means that transactions on separate days will unfortunately cause us to charge new commissions due to the additional paperwork and associated fees." Bennett added that most clients "know if they will be assigned on the day of expiration, and they can either choose to hold the stock position long or short , or simply cover the option in order to avoid a double commission" incurred through an assignment and then having to execute an offsetting trade in the underlying equity. But again, most option assignments are single-day events that will incur only a single commission.

Steve:

I am sure you get this question all the time, but this is new to me. I want to start investing in the stock market (beyond my 401(k)). Most of the advice I've received is to start not with options, but to invest in mutual funds or maybe stocks to get my feet wet. Would you give the same advice, or can a rookie investor start trading options (after being educated in their proper use)?

Thanks for your time,

-- J.

You won't find me bad-mouthing mutual funds; they've received enough abuse over the last few months. I'll add, however, that less than half of them actually outperform their benchmarks, so if you simply want market exposure, I'd suggest sticking with a low-cost index fund or exchange-traded fund such as the S&P Depositary Receipts ( SPY).

My job, of course, is to proselytize for using options. With that bias disclosure out of the way, I'd say you can definitely build a stock portfolio using options.

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