We’ve attached a few Frequently Asked Questions that will guide you towards making your first steps with options trading.
-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.
-Do all listed stocks have listed options?
Answer: No, not all stocks have options. There are standards set by the options exchanges that must be met for a stock to have options listed.
-What is liquidity?
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.
-What do “buy to open” and “sell to close” mean?
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.
-What does “going long” or “going short” mean?
You have two ways to buy a stock either you go long which means you buy shares thinking that the stock price will go up. On the contrary going short means you sell shares by borrowing them from your broker when you think that the price will go down.
-What are current option trading hours?
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.
-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.
-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, American-style ABC Corp. March 20 call entitles the buyer to purchase 100 shares of ABC Corp. common stock at $20 per share before the option’s March 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 ABC Corp. March 20 put entitles the owner to sell 100 shares of ABC Corp. common stock at $20 per share before the option’s March 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 is Time Value of an Option (TV)?
The time value (TV) (extrinsic or instrumental value) of an option is the premium a rational investor would pay over its current exercise value (intrinsic
-What is an ‘Assignment’?
Assignment takes place when the written option is exercised by the options holder. The options writer is said to be assigned the obligation to deliver the terms of the options contract. When assigned, the option writer has an obligation to complete the requirements of the option contract. If the option was a call (put) option, then the writer would have to sell (buy) the underlying security at the stated strike price. Options are generally assigned when they get closer to expiration. Only about 17% of options are exercised, this does not mean that 17% of all options positions will be assigned at a given time. Generally the 17% represents the deeper into-the-money the short options, which are more likely to be exercised.