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Options FAQ - Basics

Q: What is a stock option?
A: 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 of time (the expiration date). The contract also obligates the seller or writer to meet the terms of delivery if the contract right is exercised by the owner. For more comprehensive education, take the online, interactive Options Basic class.
Q: What is a call?
A: 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 of time (until its expiration). For example, an American-style XYZ Corp. July 60 call entitles the buyer to purchase 100 shares of XYZ Corp. common stock at 0 per share at any time prior to the option's expiration date in July. For a call option writer, or seller, the contract represents an obligation to sell the underlying stock if the option is assigned. For more comprehensive education, take the online, interactive Options Basic class.
Q: What is a put?
A: 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 of time (until its expiration). For example, an XYZ Corp. July 60 put entitles the owner to sell 100 shares of XYZ Corp. common stock at 0 per share at any time prior to the option's expiration date in July. 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. For more comprehensive education, take the online, interactive Options Basic class.
Q: What do the terms American-style and European-style mean when referring to options?
A: An American-style option may be exercised at any time prior to its expiration. A European-style option may be exercised only during a specified period before the option expires. Currently, every European-style option is exercisable only on its expiration date.

Currently, all exchange-traded equity options are American-style. Most index options are European-style. I would check each index product that you are interested on trading to verify, among other things, the options exercise style.
Q: How do LEAPS® differ from conventional options?
A: LEAPS® or Long-term Equity AnticiPation Securities are options, both calls and puts, with expirations as far out as two and one-half years. Conventional options will typically offer contracts with expirations up to nine months in the future. Currently, equity LEAPS® will have two series at any time with January expirations. For example, in August 2002, LEAPS® for a particular stock might be available with expirations of January 2004 and January 2005. Since equity LEAPS® expire only in January of these years, these LEAPS® will have different options "root symbols" to distinguish one year from another.

For an explanation of LEAPS® cycles, visit our LEAPS® FAQ's.

For information on various strategies using these versatile instruments, see LEAPS®.
Q: What is an Exchange?
A: In the financial markets, an exchange refers to a securities exchange where stocks, options and/or futures contracts are traded by members of the exchange or their own accounts and the accounts of their customers. These exchanges are registered with and regulated by the Securities and Exchange Commission (SEC). The five U.S. exchanges that list and trade equity, ETF and index options contracts are:

The American Stock Exchange (AMEX)
The Chicago Board Options Exchange (CBOE)
The International Securities Exchange (ISE)
The Pacific Exchange (PCX)
The Philadelphia Stock Exchange (PHLX)
Q: What is the Options Disclosure Document?
A: Known as The Characteristics and Risks of Standardized Options, this booklet has been written to meet the requirements of an SEC rule that requires the U.S. options markets to prepare, and brokerage firms to distribute, a booklet that briefly and generally describes the characteristics of options and the risks to investors of maintaining positions in options. Prior to buying or selling an option, investors must read a copy of this disclosure document. It explains the characteristics and risks of exchange traded options. You may view an online copy of this document in pdf format.

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.