Options 101
Options are contracts that grant investors the right to buy or sell an underlying asset at a set price on or before a set date.
Created for
Why Trade Options?
They can be an intelligent way for investors to limit risk and balance their portfolios.
1
It takes less capital for investors to purchase exposure to a security than to buy the stock outright.
2
Options can yield more per dollar invested vs. an equivalent stock transaction.
3
Risk can be tailored to meet the needs of the investor. There are a number of products in the market with varying levels of sophistication suitable to an investor’s level of risk tolerance.
Options Trading: Basics
An options contract gives the holder the right to buy (call) or sell (put) 100 shares of the underlying security at a specific price—known as the strike price—up until a specified date—known as the expiration date.
Calls
The right to buy 100 shares of the underlying security at a future date for a guaranteed price. Used for anticipating share price gains.
Puts
The right to sell 100 shares of the underlying security at a future date for a guaranteed price. Used for anticipating falling stock prices.
To participate in the options market, you can be a buyer of calls, a seller of calls, a buyer of puts or a seller of puts. You can also trade complex orders which will combine these strategies to trade simultaneously as a package.
Options may be purchased with weekly, monthly or quarterly expiration dates. For monthly stock options listed in the U.S., the expiration date falls on the third Friday of the expiration month. Quarterly options — typically for institutional investors — expire the last day of the quarter.
Weekly options trade for only eight days and provide investors with an opportunity to act on an anticipated sudden price movement, such as an earnings release. New weekly options contracts are created each week over a seven consecutive week period.
American-style options can be exercised anytime during their lifetime, while European-style options can only be cashed in at maturity.
Types of Options
Equity Options
The most popular type of options security, where the underlying investment on which it is based is the equity shares in a publicly listed company. Equity options are American-style. In April 2017, there were more than 140 million equity options contracts cleared across the exchanges.
ETF Options
A financial derivative that gives the holder the right to buy or sell the value of an underlying exchange-traded fund. Most ETF options are American-style. In April 2017, there were more than 129 million ETF options contracts cleared.
Index Options
A financial derivative that gives the holder the right to buy or sell the value of an underlying index, such as the Nasdaq 100. Most Index options are European-style and cash settled. In April 2017, there were more than 40 million index options contracts cleared.
Size of U.S. Equity Options Market
In 2016, cleared options contract volume was 3.63 billion, down from 3.73 billion in 2015. In April 2017, cleared options contract volume was just over 269 million, down from 300 million in April 2016. So far in 2017, cleared options contract volume has hit 1.18 billion.
As of April 2017, Nasdaq holds 41.91% of the U.S. multiply-listed equity options with its six options exchanges.
Nasdaq Options
Exchanges
(hover for details)
Exchange Characteristics
Options traders need to consider how much they’re paying per contract, as well as which exchanges are best for their trading needs.
Options exchanges determine which options to trade based on investor interest in the underlying security. They also set the strike prices for the options that trade in their systems.
About 66% of the contract volume in April 2017 occurred on 5 of the 15 options exchanges, where listed options are traded.
Top 5 Options
Exchanges
(hover for details)
Characteristics of the top 5 exchanges:
CBOE
Offers a trading floor and an electronic trading system. Founded in 1973 as first marketplace trading listed options.
Nasdaq PHLX
The first exchange in the U.S., founded in 1790. Offers both a trading floor and an electronic trading system, and has a full service offering.
BZX
Launched in 2008 and acquired by CBOE in 2017. This model is fully electronic.
Nasdaq ISE
The first electronic exchange, where electronic options trading was invented. Offers a fully electronic trading system.
Nasdaq Options Market
An all-electronic, price time priority trading system offering diverse order types and price improvement opportunities.