A traded option is a tradeable financial instrument that grants its owner the right, but not the obligation, to buy or sell an asset at fixed price within a prescribed period.
Traders utilise two types of options – calls and puts. Call options confer the right, but not the obligation, to buy shares* at a fixed price (and if you are bullish of a particular share, these are what you will buy). Put options, on the other hand, confer the right, but not the obligation, to sell shares at a fixed price i.e. you will buy these if you are bearish of the underlying shares. (* Buying calls and puts on FTSE is covered in another section).
Unit size:
Options are traded in contracts, or lots, each representing 1,000 shares of the underlying security. If, therefore, one is attempting to establish the cost of an individual option contract, one takes the price (normally quoted in pence) and multiplies it by one thousand. Thus, a Corp X May 1050 call, priced at 67p will actually cost £670 per contract. Traders should note that companies do occasionally reorganise their capital structure, through rights issues, stock splits etc., and this can have the effect of altering the size of the option contract, so always check with your broker first.
Expiry dates:
Each stock option has a predetermined expiry date, and the next expiry date will be three months after that etc.. At any given moment any equity option will have contracts with three different expiry dates, the furthest one away being nine months. An option will have one of the following expiry cycles:
* January, April, July, October
* February, May, August, November
* March, June, September, December
It is important to know that when one contract expires another is created: Thus, when a February contract expires a new one for November is created.
Thursday, January 21, 2010
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