The focus of the Index Workbench is primarily on the powerful investment tools known as stock index options contracts, but other products such as equity options and exchange-traded funds (ETFs) also are covered.

To check for a more recent version of the Index Workbench or for content updates, visit the online version at http://www.cboe.com/workbench.

Here are some frequently asked questions (FAQs) about options.

General Questions about the CBOE and Listed Options

When did the Chicago Board Options Exchange (CBOE) open?

On April 26, 1973, the CBOE pioneered the concept of standardized, listed stock options to be traded on a centralized, regulated marketplace. Listing call options on just 16 stocks, CBOE traded 911 contracts on that first day of business. In 1977, put options were introduced.

How big is the trading floor, and what does it take to keep it operational?

The CBOE's 45,000 square-foot trading floor opened for trading in February of 1984. The exchange is cabled with more than 50,000 miles of electrical wire, most of it beneath the trading floor. There is enough phone cable to serve a city of 200,000 people; and more information display screens under one roof than any other building in the world. The concentration of technology requires as much electricity as the nearby 110-story Sears Tower.

What is the trading volume for CBOE options?

The CBOE has established several volume records in recent years. For example, volume in 2000 was up more than 150% over the volume levels in 1990. In 2000 more than 278.9 million options traded on the CBOE, for an average daily volume of almost 1.3 million.

What is the OCC?

The Options Clearing Corporation is the sole issuer of all securities options listed at the CBOE, four other U.S. stock exchanges and the National Association of Securities Dealers, Inc. (NASD), and is the entity through which all CBOE option transactions are ultimately cleared. As the issuer of all options, OCC essentially takes the opposite side of every option traded. Because OCC basically becomes the buyer for every seller and the seller for every buyer, it allows options traders to buy and sell in a secondary market without having to find the original opposite party.

The OCC substantially reduces the credit risk aspect of trading securities options as the OCC requires that every buyer and every seller have a clearing member and that both sides of the transaction are matched. It also has the authority to make margin calls on firms during the trading day. The OCC has a triple-A credit rating from Standard & Poor's Corporation.

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.

Options - Definitions, Terms & Concepts

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?

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).

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 a contract size of an equity option?

The amount of the underlying asset covered by the options contract. This is 100 shares for one option 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 does it mean to be exercised or assigned on an option transaction?

When you buy an option you have the right to either purchase or sell stock at a predetermined price. When and if you choose to purchase or sell stock at that predetermined price you are said to be "exercising your right".

When you sell an option you now have the obligation to sell or purchase stock. You have or may not have to fulfill that obligation. You are considered to be "assigned" if you are being required to fulfill that obligation. Typically this occurs when the option is in-the-money.

What happens to my option if I do nothing?

If you bought a call or put you would lose the premium you paid for the option plus whatever commissions and fees incurred on that transaction. If you sold a call or a put and your option is in-the-money you will most likely be assigned and you will have to sell or buy stock.

When can I anticipate being assigned?

You can anticipate being assigned any time your option becomes in the money. Individual investors may be automatically assigned or exercised at expiration by The Options Clearing Corporation if the option is 0.75 or more in the money. Also, most brokerage firms have rules under which options will be automatically exercised; check with your broker to determine which automatic exercise rule may apply.

What is a European-style and American-style option?

American-style is an option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style. All stock options are American-style. European-style option contracts may be exercised only on the day before the expiration date.

What is the expiration date?

The last day (in the case of American-style) or the only day (in the case of European-style) on which an option may be exercised. For stock options, this date is the Saturday immediately following the third Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of an option buyer's intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday.

What is the last full day of trading in the Equities, OEX and SPX?
How do they settle?

The last full day of trading for Equities and OEX is the 3rd Friday of the month. They settle on the close. The last full day of trading for SPX is the Thursday before the 3rd Friday of the month. SPX settles on the opening of the 500 stocks that make up the index on Friday morning. Friday holidays push all of these dates ahead one day.

What is a strike price and how is it determined?

A strike price is the actual numeric value of the option. 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 options are available on the CBOE?

For a two-page overview of the options available at the CBOE, please click here for the CBOE Quick Reference Guide.

Placing Your Options Order

What happens to my order after I enter it with my broker?

Your order may take many routes depending on your broker and the firm that represents them on the floor. Most likely it will be routed electronically to CBOE's Order Routing System (ORS). ORS is a network of communication lines from retail member firms computers that collect and route wire orders of up to 2,000 contracts to one of three trading floor locations: booth, crowd or CBOE's Order Book Official, based on price and volume parameters set by each member firm and CBOE. It is the access system to the Electronic Book (EB), Retail Automatic Execution System (RAES), and Floor Broker Routing (FBR).

Can I place my order directly with the CBOE?

No. All orders must be entered through your broker.

Is there a difference between the reporting of last sales and the reporting of quotes?

Yes. The CBOE employs Price Reporters to manually enter the sell side of trades. The Price Reporter then keypunches this information into CBOE's audit trail system. A Quote Reporter is also employed by the CBOE and is responsible for standing in the trading pit and listening for the best bids and offers as they are yelled out in our "open outcry system".

Common Questions about LEAPS®

What are Equity LEAPS?

Equity LEAPS, or Long-term Equity Anticipation Securities are long-dated put and call options on common stock or ADRs. These long-term options provide the holder the right to purchase, in the case of a call, or sell, in the case of a put, a specified number of stock shares at a pre-determined price up to the expiration date of the option, which can be three years in the future.

When do LEAPS expire?
When can LEAPS be exercised?

As with equity options, the expiration date is the Saturday following the third Friday of the expiration month. All equity LEAPS contracts expire in the month of January. Equity options and Equity LEAPS are subject to "American style" exercise. This means the holder has the right to exercise the options on any business day prior to expiration.

How do I know when the next January expiring LEAPS will be listed?

All new January expiring equity LEAPS are initially listed on the first business day (usually a Monday) following the expiration in either May, June, or July each year. The month that the LEAP is initially listed in is dependent upon the quarterly cycle of the option. Cycle 1 options January expiring LEAPS are listed after the expiration in May, cycle 2 after the expiration in June, and cycle 3 after the expiration in July.

What can Equity LEAPS do for me?

As with regular equity options, the owner (or holder) of an Equity LEAPS call has the right to purchase, or sell in the case of a put, a pre-determined amount of stock, known as the contract size, at a pre-determined price, called the strike price, for a specified period of time. For Equity LEAPS, the specified period of time, or duration of this option, can be up to 3 years into the future. LEAPS calls can provide an investor with a medium to long-term investment view the opportunity to participate in the upward movement of a stock without making an outright stock purchase. LEAPS puts can provide a medium to long-term insurance or hedge for stock owners in the event of a substantial decline in their stocks.