What is a stock option?

A stock option is a contract that gives the owner the right, but not the obligation, to buy or sell a particular stock at a fixed price (the strike price) for a specific period (until expiration). The contract also obligates the seller or writer to meet the terms of delivery if the owner exercises the contract right.

What is a call?

A call is an option contract that gives the owner the right to buy the underlying stock at a specified price (its strike price) for a certain, fixed period (until expiration). For example, an American-style XYZ Corp. July 60 call entitles the buyer to purchase 100 shares of XYZ Corp. common stock at $60 per share before the option’s July expiration date. For a call option writer or seller, the contract represents an obligation to sell the underlying stock if the option is assigned.

What is a put?

A put is an option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period (until expiration). For example, an XYZ Corp. July 60 put entitles the owner to sell 100 shares of XYZ Corp. common stock at $60 per share before the option’s July expiration. For the writer or seller of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned.

What do the options terms American-style and European-style mean?

An option holder may exercise an American-style option any time before expiration. An option holder may exercise a European-style option only during a specified period before expiration. Currently, every European-style option is exercisable only on its expiration date.

All exchange-traded equity options are American-style. Most index options are European-style. Check each index option’s product specifications to verify the options exercise style.

How do LEAPS® differ from conventional options?

LEAPS® or Long-term Equity AnticiPation Securities are options, both calls and puts, with expirations as far as two and one-half years in the future. Conventional options typically offer contracts with expirations up to nine months in the future.

Currently, equity LEAPS® have two series at any time with January expirations. For example, in November 2014, investors would see January 2016 and January 2017 LEAPS listed for eligible stocks and indexes.

How do I find a broker?

There are several recommended initial steps to find a broker:

  • Talk with sales people at several firms. Ask about investment experience, professional background and education.
  • Investigate disciplinary actions taken by securities regulators and criminal authorities against any brokerage firm and/or sales representative by calling the National Association of Securities Dealers, Inc (NASD) toll free hot line at 1-800-289-9999. Contact your state securities regulators to verify the license of a sales representative. Investors can also check the background of a broker online via FINRA BrokerCheck. FINRA will provide information on disciplinary actions taken by securities regulators and criminal authorities. State securities regulators also can tell you if a sales representative is licensed to do business in your state.
  • Understand pay and fee structures. Ask for a copy of the firm’s commission schedule. Some firms pay sales staff based on the amount of money invested by a customer and the number of transactions done in customer’s account. A firm may pay more compensation to a sales representative for selling their firm’s own investment products. Ask what fees or charges are required to open, maintain and close an account.
  • Evaluate what services meet your needs. Determine whether you need the services of a full-service or a discount brokerage firm. A full-service firm typically provides transaction services, recommendations, investment advice and research support. A discount broker generally provides transaction services and does not make recommendations on securities to buy or sell. Fees may differ depending on services the firm provides.
What is an exchange?

In the financial markets, an exchange refers to a securities exchange where members of the exchange trade stocks, options and/or futures contracts for their own accounts and the accounts of their customers.

These exchanges are registered with and regulated by the Securities and Exchange Commission (SEC). The current U.S. exchanges that list and trade equity, ETF and index options contracts are:

What is the Options Disclosure Document?

Known as The Characteristics and Risks of Standardized Options, this booklet briefly describes the characteristics of options and risks to investors of maintaining positions in options. There is an SEC rule that requires the U.S. options markets to prepare, and brokerage firms to distribute this booklet. Prior to buying or selling an option, investors must read a copy of this booklet.

What is a strike price?

The strike price is the price at which an option holder can purchase (call) or sell (put) the underlying stock, sometimes called striking price, strike or exercise price.

Why is the XYZ 50 strike call option quote showing a last trade of $10.50 when XYZ is trading at $68 a share? Shouldn’t the call option at least be trading near the $18 of intrinsic value?

The last trade price may not reflect a recent trade. Although there will be a bid and an ask for options, they may not trade every minute, so trade prices posted as last trade may have occurred several hours, days or weeks ago. Therefore, many investors will use the option’s current quoted bid and ask price as a better indicator of the option’s current market value. This may offer a more accurate market valuation of any particular option.

Content Licensed from the Options Industry Council. All Rights Reserved. OIC or its affiliates shall not be responsible for content contained on Company’s Website, or other Company Materials not provided by OIC

Content licensed from the Options Industry Council is intended to educate investors about U.S. exchange-listed options issued by The Options Clearing Corporation, and shall not be construed as furnishing investment advice or being a recommendation, solicitation or offer to buy or sell ant option or any other security. Options involve risk and are not suitable for all investors

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