Options trades can have some complexities, so Firstrade has developed this general FAQ to address your concerns before you start trading options.
Do all listed stocks have listed options?
By the standards established by the options exchanges, securities meeting the following criteria can list options:
- A national stock exchange in accordance with the National Market System (NMS) lists the underlying equity.
- The underlying has a minimum price of $3 per share for five consecutive trading days prior to listing.
- There are at least 7 million publicly held shares outstanding, excluding shares held by directors or holders of 10% or more of the underlying equity shares (e.g., the public float must be 7 million or more).
- There are at least 2,000 shareholders.
Is increased open interest bullish?
Open interest only reflects the total number of open (long or short) option contracts for a given option series that have not yet been closed out. This indicates neither a bullish nor 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 is reported as one contract. That open interest reflects one call seller (bearish) and one call buyer (bullish).
What is liquidity?
Liquidity can have many meanings. 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.
Liquidity can also refer to the availability of stock near the last sale price. When the bid-ask spread on an option is wider than typical, 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 options transactions. Sometimes that means that the stock is more volatile, but not always. It is possible to have a volatile stock that is liquid. This means that there are many stock shares to buy or sell at prices near the last sale. In that case, the option's bid-ask is likely narrow.
When the market on an option is narrow, it typically means that investors can buy or sell shares of the underlying stock in quantity near the last sale price, or that 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.
How do I choose a strike price when buying an option?
One method would be to enter the strikes into the position simulator to see how they might react. The investor could adjust for the passage of time, movement of the underlying, and even a change in volatility. Others might want to use a spreadsheet. The investor could put the strike prices across the top row, the current price of each option in the second row, and the range of potential stock prices at expiration in the leftmost column. Then plot a grid of percent return on each option at expiration given a range of prices for the stock. This should provide a good idea of the risk-reward ratio for the various strikes.
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.
Where can I find a list of all options?
What is the one-point strike program?
The SEC allows the options exchanges to list strike prices in one-point increments. Initially, the program allowed the exchanges to list one-point strike prices on equity options for up to five individual stocks if the strike prices are $20 or less, but greater than or equal to $3. Under the new program, each exchange can elect to list one-point strike prices on equity options for up to 150 individual securities provided that the strike prices are $50 or less, but greater than or equal to $1. The options exchanges are restricted from listing any series that would result in strike prices being $0.50 apart.
In addition, all ETFs may list strikes in $1 intervals up to $200.
Where can I find historical options prices?
For files of data you will need to contact a data vendor. You can find a list of vendors on the OPRA site here.
Your broker may be able to obtain some prices for you. Each exchange will provide a limited amount of data from their exchange for free. For larger amounts of data they will charge a fee.
How do I figure out the taxes on my options trades?
You will want to contact your broker or tax advisor for guidance. For more information on tax-related matters, you may refer to our online Taxes & Investing - A Guide for the Individual Investor brochure (PDF).
Where can I find an options expiration calendar?
Can I trade options in my IRA?
Probably, depending on your brokerage firm’s policies and procedures regarding trading in retirement accounts. Find a firm that offers you the flexibility you desire. Read the Cboe White Paper (PDF) on the subject.
Where can I find current and historical put/call ratios for individual stocks?
What are equity options position limits and where can I find them?
Position limits are the amount of contracts that any controlling entity's account may have open positions in, on the same side of the market. For example, long calls and short puts are considered to be on the same side of the market. Although most public investors will never come close to the position limits for any option class, OCC offers a current list (represented in shares) of the limits.
In addition, each options exchange has its own position limit rule. You can find these rules by visiting their respective websites.
What is the record for the highest option volume day?
As of July 31, 2013, the top option volume day was August 8, 2011 when 41,859,875 options traded.
How do employee stock options differ from standardized options?
Employee stock options differ in three main ways from what many refer to as standardized (or ordinary) options:
- Exchanges do not trade employee stock options. In contrast, standardized options are traded on exchanges.
- Employee stock options are not standardized as they have unique expiration dates and restrictions specific to the employee’s company and compensation program; whereas exchange-traded options have standardized terms, normally representing 100 shares of the underlying equity, with routine expiration dates.
- Employee stock options generally are not transferable. Standardized options are fungible and can be bought and sold during exchange trading hours on any exchange that lists them.
What are current option trading hours?
Options on equities, narrow-based (sector) indexes and narrow-based ETFs, generally open at 9:30 am ET and close for trading at 4:00 pm 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 are the trading hours for ETFs?
Trading hours for ETFs vary. Generally, ETFs based on broad-based indexes trade until 4:15 pm ET.
The general rule for options on ETFs is that they are open for trading whenever shares of the underlying ETF are open in the primary market.
What are quarterly options?
Quarterly options (quarterlys) are options that expire at the close of business on the last business day of a calendar quarter (March/June/September/December). The last business day of a calendar quarter is also the last trading day for quarterly options. Visit the exchange website where the option trades to learn more.
Can you explain options trading in penny increments?
In early 2007, the option exchanges began a pilot program to trade options in $0.01 increments. The pilot included 13 stocks and exchange-traded funds (ETFs). The $0.01 increments were available for options with a quoted price of less than $3. Options with a quoted price above $3 were available in nickel ($0.05) increments. All IWM, SPY, and QQQ options, however, were quoted in $0.01 increments.
Since its initial rollout, the penny pilot program has been expanded to include well over 350 securities. Please note that all of the exchanges have the ability to provide executions in penny increments.
Can you tell me about the $0.50 strike program?
The options exchanges utilize a $0.50 strike program that allows the exchanges to list $0.50 strikes, beginning at $0.50 and up through and including $5.50, on up to 20 equity option classes whose underlying security closed at or below $5.00.
To be eligible, an underlying stock must close at or below $5.00 in its primary market on the previous trading day and have a national average daily volume that equals or exceeds 1,000 contracts per day as determined by OCC during the preceding three calendar months. After adding an option class to the $0.50 strike program, the exchanges can list $0.50 strike prices of $0.50, $1, $1.50, $2, $2.50, $3 and $3.50, $4, $4.50, $5, and $5.50.
This program has been expanded to include some short-term options.
Firstrade brings you a number of resources to understand options trades. Our next FAQ section covers the basics of options trades. To start trading options, open your account at Firstrade today.
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