| |
|
|
Options FAQ - General information
| Q: |
Can options be traded on any listed stock? |
| A: |
By the standards established by the options exchanges, options can only be listed on securities meeting all the following criteria at the time of listing:
The underlying equity must be listed on the NYSE, Amex or Nasdaq.
The closing stock price must have a minimum price per share for a majority of the trading days during the three prior calendar months.
There must be at least seven million publicly-held shares outstanding.
There must be at least 2,000 shareholders.
Generally, it would be a minimum of three months from the IPO date before options could be listed on any stock.
|
| Q: |
Is increased open interest bullish? |
| A: |
You should keep in mind that open interest only reflects the total number of option contracts for a given option series which have been opened but not yet closed out. This indicates neither a bullish or 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 would be reported as one (1) contract. That open interest reflects one call seller (bearish) and one call buyer (bullish). Is that bullish or bearish? Most people would agree that the number is neutral and does not reflect any bullish or bearish sentiment.
|
| Q: |
On a recent trading day, the volume of options traded on a specific contract was about 3,000, yet the next day open interest had only increased by approximately 1,800. How can that be? |
| A: |
We've put together a little chart that you might find helpful. The fact is, that to accurately reflect open interest we need to know if the buyer AND the seller are opening or closing positions. (Example is assuming 1 contract in the trade.)
| Open Interest |
| 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 impact on open interest depends on whether the buyer and seller are opening or closing positions. The answer to your question is that only after the end of the day, when opening and closing positions are cleared and "paired up" can the new open interest be reported.
|
| Q: |
What does liquidity mean? |
| A: |
Liquidity refers to the availability of stock near the last sale price. When the bid-ask on an option is wider than "normal," 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 option transactions. Sometimes that means that the stock is more volatile, but not always. It is possible, for example, to have a volatile stock that is very liquid, meaning that there are usually lots of stock shares to buy or sell at prices near the last sale. In that case, the options' bid-ask would most likely be narrow. When the market in an option is narrow, it may mean that shares of the underlying stock can either be bought or sold in quantity near the last sale price or 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.
|
| Q: |
How do I select the proper strike price when I purchase an option? |
| A: |
A good method of analyzing all the potential strike price selections is to use a spreadsheet. Put the strike prices across the top row, the current price of each option in the 2nd row, and the range of potential stock at expiration in the leftmost column. Then you can plot a grid of percent return on each option to expiration given a range of prices for the stock. This should give you a good idea of the risk-reward ratio for the various strikes.
|
| Q: |
What do "Buy to Open" and "Sell to Close" mean? |
| A: |
Those designations refer to your positions - long or short contracts. If an investor has no previous position in an option contract, any purchase would be "to open". Hence, a "buy to open" order. If the investor is increasing a position that they already have, that would be "opening" too. Conversely, should an investor wish to close or decrease an existing position, that order would be entered as a "closing" transaction.
|
| Q: |
Can I sell my stock today at a loss for this calendar year and simultaneously buy a call option that allows me to participate in any upward movement in the stock I just sold? |
| A: |
This particular strategy may be a violation of the "wash-sale" rule. The wash-sale rule prevents taxpayers who are not 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.
For more information on wash-sale rules and other tax-related matters please refer to the Taxes & Investing - A Guide for the Individual Investor.
|
| Q: |
What do Options have to offer? |
| A: |
Listed options are uniquely flexible financial instruments that offer investors a variety of uses. They can be used alone, or in conjunction with the ownership of individual stocks or a portfolio.
First and foremost, options are instruments of risk transfer. They can be used to increase an investor's market exposure with limited, predetermined risk, or to reduce the financial market risk an investor might be subject to by holding an individual stock or a portfolio of stocks.
Much like stocks, options can be used to take a position on the market, in an effort to capitalize on an anticipated market move up or down. Unlike stocks, however, options can provide an investor the financial benefits of leverage over a position in an individual stock or a basket of stocks reflecting the broad market. At the same time, options buyers also can take advantage of predetermined, limited risk. Option writers on the other hand, assume significant risk if they do not hedge their positions.
|
| Q: |
I recently bought a LEAPS call option. The stock has risen in value, and so has the call option. I'd like to sell my contract, but am wondering if I am obligating myself to deliver stock if another option holder exercises their call option? |
| A: |
Since you are closing out your position by selling an open long call, the positions will offset one another. Accordingly, you will not have an open short position in the call, and will not be obligated to deliver the underlying stock. When a call option is sold 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. An instructor for the Options Industry Council has frequently mentioned that "option holders have rights, and option sellers have obligations."
|
| Q: |
I've been hearing a lot about inflation and deflation. Can you explain the difference between the two? |
| A: |
Inflation is rise in prices of goods and services, as happens when spending increases relative to the supply of goods on the market - in other words, too much money chasing too few goods. Moderate inflation is a common result of economic growth. Deflation is a decline in the prices of goods and services. Generally, the economic effects of deflation are the opposite of those produced by inflation, with two notable exceptions: (1) prices that increase with inflation do not necessarily decrease with deflation (2) while inflation may or may not stimulate output and employment, marked deflation has always affected both negatively.
|
Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.
Content Licensed by the Options Industry Council. All Rights Reserved. OIC or its affiliates shall not be responsible for content contained on the E*TRADE Securities Website not provided by OIC. Content licensed by 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 any option or any other security. Options involve risk and are not suitable for all investors.
No information provided by The Options Industry Council Website has been endorsed or approved by E*TRADE Securities LLC, and E*TRADE Securities is not responsible for the contents provided by The Options Industry Council.
|
Refresh August 31, 2025 11:41 PM ET
Back to Top