Equity Options, Stock Options Trading
Equity options are actually contracts that are negotiated between an option writer or seller, and an option holder or buyer, and it is based on the exchange of thesecurities involved at a specified strike price.
Call options and put options are the two kinds of equity options. The Call Options provide the buying party the right to participate along with the buying of a security during a specified time based on the standardized strike price.
The investors who are involved in buying Call options anticipate that the security’s value will go up when they follow along with the purchase they made.
Following the struck of a contract in a call option, the purchaser may opt to go through the purchase at the time specified, alternatively, the purchaser can opt out; however, the seller must oblige stick with the transaction decision.
Put Options; these are contracts between the put writer – also known as the owners of an instrument – , and the put holder (an investor) who is optimistic that the instrument’s value will decline within a time frame called exercise period.
The investor pays the strike amount in addition to a premium value for the security. It is important to note that if in the course of the exercise period or timeframe, the value of that specific security falls as anticipated, the investor can offer the option of equity back to the instrument owner for sale at the strike price in original amount.
Units of Trade: Units of trade per option contract is 100 shares.
Premium quotations are specified in points and fractions. 1 point = $100. For series trading less than 3, the minimum tick is .05 ($5.00), and 10 ($10.00 for other series.
The Strike Price Intervals is 2-1/2 points for stocks trading less than $25, while stocks trading from $25 – $200 is 5 points. 10 points is for stocks trading above $200.
Equity Options Exercise Style: for the American exercise style, the exercise of option may be any business day preceding the expiration date.
The expiration months are 2 near-term months in addition to 2 extra months in the Jan, Feb, or March quarterly cycle.
Expiration date is the immediate Saturday to the third Friday of the month of expiration.
Position Limits: these differ based on the number of share outstanding, as well as the trading volume. An option position limit of 250,000 contracts is attributed to the largest stocks that are traded most frequently.
On the other hand, position limits of 25,000, 50,000, 75,000 or 200,000 may be offered by smaller capitalization stocks. Also, there may be some ETF position limits higher than 250,000. The investor can find customer hedge exemptions.
With respect to the exercise settlement time, the exercise notices or notifications tendered on any business day will mean underlying stock delivery on the 3rd business day next to exercise.
When computing maintenance margin, it is recommended that the option current market value be used rather than the option proceeds.
In most cases, equity options are in fact put options in which the security owner is expecting to make quick money from the said premium price that is charged for the put option’s sale.
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Happy Trading,
Category: OPTIONS BASICS
