Vanguard Options Trading 3-star brokerage rating

Vanguard Options Trading in 2022



Vanguard Options Fees


Are you an investor looking to trade options with a Vanguard brokerage account? If so, you read this article, which reviews all the relevant options-related commissions and fees you will encounter using Vanguard.


Vanguard Options Commissions


Commissions and fees for Vanguard Brokerage Services are as follows.


Vanguard Options Pricing


For option assets invested in Vanguard ETFs & Mutual Funds:
Less than $1 million = $0 + $1 per-contract fee
$1 million to $5 million = $0 for first 25 trades; $0 + $1-per-contract fee thereafter
$5 million or more = $0 for first 100 trades; $0 + $1-per-contract fee thereafter


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Vanguard Options Exercise and Assignment Fees


For all options transacted on Vanguard’s Brokerage Account, there are zero exercise and assignment commissions or fees.


Vanguard Options Levels


An option contract allows buyers the opportunity to buy or sell - depending on the type of contract - the underlying asset at a specified time (expiration date) and price (strike price) in the future. Each option contract’s expiration date indicates the time at which the holder must exercise their option at the stated strike price.

As a result of their complexity, Vanguard advises their customers to educate themselves on the nature of options and then determine their option trading strategy based on their unique investment goals and risk tolerance.

To get started trading options with a Vanguard Brokerage account, investors must submit an application for approval. A “Brokerage Option Application” must be completed for each brokerage account that you intend to use for options trading.

From there, Vanguard will review your application, considering 1) your account type, 2) the information you provided about your finances, 3) your trading experience, and 4) your investment objectives. You will receive notice of your approval or denial by mail from Vanguard.

Vanguard has four levels of options approval, detailed as follows:

Level 1: Write covered calls, purchase protective puts, and write covered puts. (Margin approval is required to write covered puts.)

Level 2: Purchase calls and puts. Write cash-secured puts. (Includes Level 1.)

Level 3: Trade equity and index spreads. (Includes Levels 1 and 2.)

Level 4: Write uncovered (naked) puts. (Includes Levels 1, 2, and 3.)

Please note that an additional application, called a “Margin Account Application”, must be completed to be eligible for writing covered puts, and for Levels 3 and 4.


Call Options & Put Options


The two most basic types of options contracts are calls and puts.

Buying a call option means you are buying the right to purchase a security at a locked-in price (“strike price”) in the future. If the price rises, the call investor can make a profit by exercising their option at the agreed-upon price in the contract and then reselling the security on the open market at the higher price.

Buying a put option, on the other hand, means buying the right to sell someone else a specific security at a strike price in the future. If the price falls, the put investor can make a profit by buying the security in the open market at the lower price and then exercising the put option at the higher strike price.

Vanguard allows you to buy either. In effect, when you buy either type, you will have the ability to exercise the option if it benefits you - but can also let it expire if it doesn’t. You can also sell your own options (“writing” options). Because the choice of whether or not to exercise is in the buyer’s hands and not the writer’s after the sale, writing options can therefore be significantly riskier.

As mentioned before, depending on your investment level the commission per option contract will differ, but at most will only ever cost $1 per-contact currently. For most investors (investing less $1 million), option trading calls and puts will cost you a $1 per-contract fee on your Vanguard investment account for each transaction made.


Writing Covered vs. Uncovered Options Trades


When selling (“writing”) options, you are agreeing to a future obligation to the party on the other end of the transaction, the buyer. There are two ways to write options - covered and uncovered.

A covered option - a call or put - means you purchase the underlying security at its current market price alongside the sale of your option, so as to cover its delivery to the buyer when the exercise comes.

An uncovered, or “naked”, option means that you do not purchase the underlying security to buy or sell to the option holder when they choose to exercise their contract. This means the writer of an uncovered option will need to make that transaction in the future, at a future, unknown market price, and additional money may need to be raised or borrowed to service that obligation as the option writer. This circumstance can trigger what is called a “margin call.” And this is why, for certain option transactions to be approved for a Vanguard account holder, they must complete the “Margin Account Application.”

Please note that due to there being no limit to how high a stock price can rise, there is thus no limit to the amount of money that could be lost writing an uncovered call option specifically. As a result, many brokerages - including Vanguard - do not allow investors to write uncovered call options at all.

The same commission and fee structure is present for covered or uncovered call writing, with a $1 per-contract fee, unless you exceed $1 million in your Vanguard option investments balance, in which case the first 25-100 trades will be free, depending on your options investment balance.


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About the Author
Arthur Chachuna is professional personal finance blogger, and the owner of Brokerage-Review.com. He has been an avid investor for 23 years, and has background in both applied math and programming.