By the standards established by the options exchanges, securities meeting the following criteria can list options:
- A national stock exchange in accordance with the National Market System (NMS) lists the underlying equity.
- The underlying has a minimum price of $3 per share for five consecutive trading days prior to listing.
- There are at least 7 million publicly held shares outstanding, excluding shares held by directors or holders of 10% or more of the underlying equity shares (e.g., the public float must be 7 million or more).
- There are at least 2,000 shareholders.
Generally, there would be a minimum of five trading days from the IPO date before listing options on any stock, but meeting these criteria alone would not guarantee listing.
Open interest only reflects the total number of open (long or short) option contracts for a given option series that have not yet been closed out. This indicates neither a bullish nor bearish outlook. For example, if there is no existing open interest and you buy one contract from another customer, and no more trading occurs, the open interest in that series is reported as one contract. That open interest reflects one call seller (bearish) and one call buyer (bullish).
To accurately reflect open interest we need to know if the buyer and seller are opening or closing positions. (Example assumes one contract traded.)
|If Buy is:||If Sell is:||Open Interest then:|
|to open||+||to open||increases by 1|
|to open||+||to close||no change|
|to close||+||to open||no change|
|to close||+||to close||Decreases by 1|
As the above table illustrates, the open interest depends on whether the buyer and seller are opening or closing positions. OCC can only report new open interest after clearing and pairing opening and closing positions at the end of the day.
Liquidity can have many meanings. In the context of securities trading, liquidity is generally the term used to describe the ease of entering and or exiting a securities position at a fair price. A “liquid market” is evidenced by a tight (or small) spread between bid and offer, as well as large size bid and offer.
Liquidity can also refer to the availability of stock near the last sale price. When the bid-ask spread on an option is wider than typical, it usually means that the market makers are not sure where they can reliably buy or sell shares of the underlying stock to hedge possible options transactions. Sometimes that means that the stock is more volatile, but not always. It is possible to have a volatile stock that is liquid. This means that there are many stock shares to buy or sell at prices near the last sale. In that case, the options’ bid-ask is likely narrow.
When the market on an option is narrow, it typically means that investors can buy or sell shares of the underlying stock in quantity near the last sale price, or that the option itself has a lot of buyers and sellers near the last sale price of the option. Usually if an option is liquid, the underlying stock is also liquid.
One method would be to enter the strikes into the Position Simulator to see how they might react. The investor could adjust for the passage of time, movement of the underlying, and even a change in volatility. Others might want to use a spreadsheet. The investor could put the strike prices across the top row, the current price of each option in the second row, and the range of potential stock prices at expiration in the leftmost column. Then plot a grid of percent return on each option at expiration given a range of prices for the stock. This should provide a good idea of the risk-reward ratio for the various strikes.
An opening transaction is one that adds to or creates a new trading position. It can be either a purchase or a sale. With respect to an option transaction, consider both:
- An opening purchase is a transaction in which the purchaser’s intention is to create or increase a long position in a given series of options.
- An opening sale is a transaction in which the seller’s intention is to create or increase a short position in a given series of options.
- A closing purchase is a transaction in which the purchaser’s intention is to reduce or eliminate a short position in a given series of options. This transaction is frequently referred to as “covering” a short position.
- A closing sale is a transaction in which the seller’s intention is to reduce or eliminate a long position in a given series of options.
This particular strategy may be a violation of the wash-sale rule. The wash-sale rule prevents taxpayers who are not broker-dealers from selling stock or securities (including options) at a loss and reacquiring substantially identical stock or securities (or options to acquire substantially identical stock or securities) within a 30-day period before or after the loss.
Contact your broker or tax advisor for guidance.
When you “close” an option position you eliminate your rights or obligations associated with the option position. Since you are closing out your position by selling an open long call, the closing sale will eliminate your position; the sale will offset the previous purchase. Accordingly, you will not have an open short position in the call, and will not be obligated to deliver the underlying stock. When an investor sells a call option to establish an open short position, the option seller or writer is obligated to deliver the stock at any time during the life of the option contract, if assigned. The life of the option contract ends either at expiration of the option or when you choose to close your position. Think of it this way: option holders have rights, and option sellers have obligations. The rights and or obligations are eliminated when you no longer hold an open position. One options industry operational caveat is that assignments are determined based on net positions after the close of the market each day. Therefore, if you bought back your short call, you no longer have a short position at the end of the day and no possibility of assignment thereafter.
A common misconception is that volume and open interest equate with liquidity. While higher trade activity may create added liquidity through competition, each option has market makers and professional traders who take on the responsibility of making a market for all of the series that they represent. By asking your broker for a two-sided market with size, you can find out how many contracts are bid or offered at any time during the trading day. Don’t let the open interest or volume fool you into thinking that there is or is not liquidity in that specific contract.
Unless the option is so out-of-the-money that nobody has any interest in a purchase or in very unusual market conditions, such as a trading halt in the underlying, there will normally be a market. For example, if an option has less than five trading days left and is 10 points out-of-the-money, you may not find anyone that would want to own that contract. Then, the market might be .00 bid – .20 ask.
When you look at open interest, which is simply the number of outstanding long (or short) contracts, you’re seeing an indication of which options were previously the most active.
The SEC allows the options exchanges to list strike prices in one-point increments. Initially, the program allowed the exchanges to list one-point strike prices on equity options for up to five individual stocks if the strike prices are $20 or less, but greater than or equal to $3. Under the new program, each exchange can elect to list one-point strike prices on equity options for up to 150 individual securities provided that the strike prices are $50 or less, but greater than or equal to $1. The options exchanges are restricted from listing any series that would result in strike prices being $0.50 apart.
In addition, all ETFs may list strikes in $1 intervals up to $200.
Note: The participating securities may change from time to time.
For files of data you will need to contact a data vendor. You can find a list of vendors on the OPRA site here.
Your broker may be able to obtain some prices for you. Each exchange will provide a limited amount of data from their exchange for free. For larger amounts of data they will charge a fee.
You will want to contact your broker or tax advisor for guidance.
Probably, depending on your brokerage firm’s policies and procedures regarding trading in retirement accounts. Find a firm that offers you the flexibility you desire. Read the CBOE White Paper (PDF) on the subject.
Position limits are the amount of contracts that any controlling entity’s account may have open positions in, on the same side of the market. For example, long calls and short puts are considered to be on the same side of the market.
In addition, each options exchange has its own position limit rule. You can find these rules by visiting their respective websites.
As of July 31, 2013, the top option volume day was August 8, 2011 when 41,859,875 options traded.
Employee stock options differ in three main ways from what many refer to as standardized (or ordinary) options:
- Exchanges do not trade employee stock options. In contrast, standardized options are traded on exchanges.
- Employee stock options are not standardized as they have unique expiration dates and restrictions specific to the employee’s company and compensation program; whereas exchange-traded options have standardized terms, normally representing 100 shares of the underlying equity, with routine expiration dates.
- Employee stock options generally are not transferable. Standardized options are fungible and can be bought and sold during exchange trading hours on any exchange that lists them.
Options on equities, narrow-based (sector) indexes and narrow-based ETFs, generally open at 9:30 a.m. ET and close for trading at 4:00 p.m. ET. Options on some broad-based ETFs and index products trade until 4:15 p.m. ET. Please consult the product specifications at the exchange where the product trades for exact trading hours.
Trading hours for ETFs vary. Generally, ETFs based on broad-based indexes trade until 4:15 p.m. ET.
The general rule for options on ETFs is that they are open for trading whenever shares of the underlying ETF are open in the primary market.
Quarterly options (Quarterlys) are options that expire at the close of business on the last business day of a calendar quarter (March/June/September/December). The last business day of a calendar quarter is also the last trading day for quarterly options. Visit the exchange website where the option trades to learn more.
In early 2007, the option exchanges began a pilot program to trade options in $.01 increments. The pilot included 13 stocks and exchange-traded funds (ETFs). The $0.01 increments were available for options with a quoted price of less than $3. Options with a quoted price above $3 were available in nickel ($0.05) increments. All IWM, SPY and QQQ options, however, were quoted in $.01 increments.
Since its initial rollout, the penny pilot program has been expanded to include well over 350 securities. Please note that all of the exchanges have the ability to provide executions in penny increments.
When you open a short option position, your account will be credited the premium of the option less commissions. However, to account for the position, brokerage firms generally show the short option as a negative in the account, essentially subtracting the market value of the call from the account net worth.
Consider buying stock: you do not immediately make the amount of the purchase. Rather there is a debit in the account equal to the cost of the stock plus commissions. If you started with $5,000 and purchased $5,000 worth of stock, there is a credit for the stock and a debit for the cost. The account value is still $5,000 (assuming the stock price does not change).
When shorting options (like a covered call), you are credited the proceeds and debited the option value. If the option eventually goes worthless, this debit would become zero. If you did not subtract the short option from the value of the account, the value would appear inflated. To prevent this, subtract the market value of the short option from the account net worth. The proceeds from the option are generally available to use for other investments or to remove from the account.
Discuss this further with your broker as we can only generalize how they may be accounting for your positions.
In the last quarter of 2012, the options exchanges received regulatory approval for extended weekly expirations. The options exchanges can now list up to five consecutive weekly expirations for selected securities. Although any product with weekly expirations can be part of the extended weekly program, the exchanges will typically select the most actively traded options.
If the regular monthly expiration is three weeks away, then investors would most likely see weekly, weekly, monthly, weekly and weekly expirations listed over a five-week period. Therefore, no new weeklys are listed that would expire during the expiration week for regular options, which is typically the third Friday of each month, nor would they be listed if they would expire on the same date as a quarterly option on the same underlying.
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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