This list represents some of the most frequently asked questions relating to the Chicago Board Options Exchange and options trading in general.
Basic Options Information and Terms
What is an option?
A stock option is a contract which gives the buyer the right, but not the
obligation, to buy or sell shares of the underlying security or index at a
specific price for a specified time. Stock option contracts generally are for
100 shares of the underlying stock. There are two types of options, calls and
puts.
What is a call option?
A call option gives the buyer the right, but not the obligation, to buy the
underlying security at a specific price for a specified time. The seller of a
call option has the obligation to sell the underlying security should the buyer
exercise his option to buy.
What is a put option?
A put option gives the buyer the right, but not the obligation, to sell an
underlying security at a specific price for a specified time. The seller of a
put option has the obligation to buy the underlying security should the buyer
choose to exercise his option to sell.
What is the option premium?
The premium is the price at which the contract trades. The premium is the price
of the option and is paid by the buyer to the writer, or seller, of the option.
In return, the writer of the call option is obligated to deliver the underlying
security to an option buyer if the call is exercised or buy the underlying
security if the put is exercised. The writer keeps the premium whether or not
the option is exercised.
What is a strike price and how is it determined?
The strike, or exercise, price of an option is the specified share price at
which the shares of stock can be bought or sold by the buyer if he exercises
the right to buy (in the case of a call) or sell (in the case of a put) and is
the actual numeric value of the option upon exercise . For example, a May
option may have strike prices of 45, 50 and 55. Strike prices are determined
when the underlying reaches a certain numeric value and trades consistently at
or above that value. If, for example, XYZ stock was trading at 49, hit a price
of 50 and traded consistently at this level, the next highest strike may be
added.
What is an at-the-money option? An in-the-money option? An out-of-the money
option?
When the price of the underlying security is equal to the strike price, an
option is at-the-money. A call option is in-the-money if the strike price is
less than the market price of the underlying security. A put option is
in-the-money if the strike price is greater than the market price of the
underlying security. A call option is out-of-the-money if the strike price is
greater than the market price of the underlying security. A put option is
out-of-the money if the strike price is less than the market price of the
underlying security.
What is the contract size of an equity option?
The contract size of an option refers to the amount of the underlying asset
covered by the options contract. One option is equal to 100 shares unless
adjusted for a special event, such as a stock split or a stock dividend.
What is open interest?
Open interest refers to the number of outstanding option contracts in the
exchange market or in a particular class or series.
What is a market-maker?
Market-makers provide liquidity in option trading by risking their own capital
for personal trading, and are the backbone of the CBOE's trading system. They
take the opposite side of public orders by competing in an open outcry auction
market. Floor brokers, on the other hand, act only as agents, executing orders
for public or firm accounts.
Does a "specialist" buy and sell options?
Most option classes listed at the CBOE are traded in an open outcry system
where certain members of the Exchange may trade as market-makers. Market-makers
provide liquidity in option trading by risking their own capital for personal
trading, and are the backbone of the CBOE's trading system. They take the
opposite side of public orders by competing in an open outcry auction market.
This differs from the trading environment on many other exchanges where
"specialists" are allowed to accept orders from the public, to manage the
public order book and to deal for their own accounts in the same securities.
What is fair value?
The term "fair value" (also "theoretical
value") means that, statistically, the stated option price favors neither
the buyer nor the seller. Option pricing formulas require six inputs,
underlying price, strike price, time to expiration, interest rates, dividends
and volatility.
Option prices do not predict the direction of the price of the underlying
instrument. An analogy can be made between options and insurance. If you pay a
"fair price" for homeowner's insurance, there is no prediction in the
price of the policy as to whether or not your house will burn down.
What are regular trading hours?
Regular trading hours are:
Equities: 8:30 a.m. to 3:00 p.m. Central Time
Indexes: Trading hours vary depending upon the index product. Please check the specification page of the Index in question, by visiting the Products section of CBOE.com.
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