Options Trading - Page 4

STANDARDIZED TERMS Every option contract is defined by certain terms, or characteristics. Most listed options' terms are standardized, so that options that are listed on one or more exchanges are fungible, or interchangeable. The standardized terms include: Contract size: For equity options, the amount of underlying interest is generally set at 100 shares of stock. Expiration month: Every option has a predetermined expiration and last trading date. Exercise price: The available strike prices for an option may be one, two and a half, five, or ten point increments that bracket the current market price of the underlying equity. The increment that's used depends on the market price of the equity. Type of delivery: Most equity options are physical delivery contracts, which means that shares of stock must change hands at the time of exercise. Most index options are cash settled, which means the in-the-money holder receives a certain amount of cash upon exercise. Style: Options that can be exercised at any point before expiration are American style. Options that can be exercised only on the day of expiration are European style. CASHING OUT Some options are subject to automatic exercise, which means that if they are in-the-money by specified amounts at expiration OCC automatically exercises the option on behalf of the holder, unless instructed otherwise. Individual brokerage firms often have their own policies too, and might automatically exercise any options that are in-the-money by a certain amount. You should check with your brokerage firm to learn whether automatic exercise applies to any of your long positions. Adjustment provisions: Representatives from each exchange determine any adjustments that might be made to the terms of an options series in response to a stock split, merger, or other corporate action. An options class refers to all the calls or all the puts on a given underlying security. Within a class of options, contracts share some of the same terms, such as contract size and exercise style. An options series is all contracts that have identical terms, including expiration month and strike price. For example, all LMN calls are part of the same class, while all LMN February 90 calls are part of the same series. << Back

Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.

Disclaimer: This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.