by The Options Industry Council | April 13, 2011 4:40 pm
A: By the standards established by the options exchanges, options can only be listed on securities meeting all the following criteria at the time of listing:
Generally, there would be a minimum of five days from the IPO date before options could be listed on any stock, but this criteria alone would not guarantee listing.
A: You should keep in mind that open interest only reflects the total number of long (or short) option contracts for a given option series which have been opened but not yet closed out. This indicates neither a bullish or 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 would be reported as one (1) contract. That open interest reflects one call seller (bearish) and one call buyer (bullish). Is that bullish or bearish? Most people would agree that the number is neutral and does not reflect any bullish or bearish sentiment.
A: To accurately reflect open interest we need to know if the buyer AND the seller are opening or closing positions. (Example assumes 1 contract traded.)
|If Buy is:||If Sell is:||Open Interest then:|
|to open||+||to open||increases by 1|
|to open||+||to close||no change|
|to close||+||to open||no change|
|to close||+||to close||decreases by 1|
As the above table illustrates, the impact on open interest depends on whether the buyer and seller are opening or closing positions. The answer to your question is that only after the end of the day, when opening and closing positions are cleared and “paired up” can the new open interest be reported.
A: Liquidity refers to the availability of stock near the last sale price. When the bid-ask on an option is wider than “normal,” 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 option transactions. Sometimes that means that the stock is more volatile, but not always. It is possible, for example, to have a volatile stock that is very liquid, meaning that there are usually lots of stock shares to buy or sell at prices near the last sale. In that case, the options’ bid-ask would most likely be narrow. When the market in an option is narrow, it may mean that shares of the underlying stock can either be bought or sold in quantity near the last sale price or 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.
A: A good method of analyzing all the potential strike price selections is to use a spreadsheet. Put the strike prices across the top row, the current price of each option in the 2nd row, and the range of potential stock at expiration in the leftmost column. Then you can plot a grid of percent return on each option to expiration given a range of prices for the stock. This should give you a good idea of the risk-reward ratio for the various strikes.
A: Those designations refer to your positions – long or short contracts. If an investor has no previous position in an option contract, any purchase would be “to open”. Hence, a “buy to open” order. If the investor is increasing a position that they already have, that would be “opening” too. Conversely, should an investor wish to close or decrease an existing position, that order would be entered as a “closing” transaction.
A: This particular strategy may be a violation of the “wash-sale” rule. The wash-sale rule prevents taxpayers who are not dealers from selling stock or securities (including options) at a loss and reacquiring “substantially identical” stock or securities (or options to acquire substantially identical stock or securities) within a 30-day period before or after the loss.
We recommend that you contact your broker or tax advisor for guidance. For more information on wash-sale rules and other tax-related matters please refer to our online “Taxes & Investing – A Guide for the Individual Investor” brochure (PDF) or call 1-888-OPTIONS (678-4667) for a printed version of this free guide.
Q: I recently bought a LEAPS® call option. The stock has risen in value, and so has the call option. I’d like to sell my contract, but am wondering if I am obligating myself to deliver stock if another option holder exercises their call option?
A: Since you are closing out your position by selling an open long call, the positions will offset one another. Accordingly, you will not have an open short position in the call, and will not be obligated to deliver the underlying stock. When a call option is sold to establish an open short position the option seller, or “writer” is obligated to deliver the stock at any time during the life of the option contract, if assigned. An instructor for the Options Industry Council has frequently mentioned that “option holders have rights, and option sellers have obligations.”
A: In the Tools & Literature area, under the Market Data section on this site, you’ll see the Directory of Listed Options (XLS). It is updated monthly!
A: A common misconception is that volume and open interest equate with liquidity. While higher trade activity may create added liquidity through competition, each option has market-makers and professional traders who have taken on the responsibility of making a market for all of the series that they represent. By asking your broker for a “two-sided market with size” you can find out how many contracts are bid or offered at any time during the trading day. Don’t let the volume fool you into thinking that there’s not liquidity in the market. Unless the option is so out-of-the-money that nobody has any interest in a purchase or in very unusual market conditions, such as a trading halt in the underlying, there will normally be a market. For example, if an option has less than 5 trading days left and is 10 points out-of-the-money, you may not find anyone that would want to own that contract. Then, the market might be 0 bid – .20 ask.
When you look at open interest, which is simply the number of outstanding long (or short) contracts, what you’re seeing is an indication of which options were previously the most active. If you feel it’s really important to trade only options with a high level of activity, you can find volume and open interest data under the Market Data area.
A: Yes, OCC’s Equity Special Settlement Report will contain all equity option products that have non-standard terms of settlement and/or multiple components of delivery. The file will contain one record per delivery component for every option contract considered to have “Special Settlement Terms”. There is a “key” at the top of the headings.
To read about HOW that adjustment came about, you can access the Informational Memos section of the OCC’s web site.
A: The options exchanges received SEC approval to expand and make permanent the ability to list strike prices in $1.00 increments. Initially, the program allowed the exchanges to list dollar strike prices on equity options for up to five individual stocks provided that the strike prices are $20.00 or less, but greater than or equal to $3.00. Under the recently approved program, each exchange can elect to list dollar strike prices on equity options for up to fifty-five individual securities provided that the strike prices are $50.00 or less, but greater than or equal to $1.00. Additionally, no $1 strike may be listed that is greater than $5 from the underlying stocks closing price in its primary market on the previous day. The options exchanges are also restricted from listing any series that would result in strike prices being $0.50 apart.
Note: The participating securities may change. To download an excel spreadsheet of current participants in this dollar strike program as of 7/13/10, click here.
A: Currently, the Chicago Board Options Exchange and the International Securities Exchange make historical options pricing available on a subscription basis. Information on these offerings are available at the following links:
Additionally, you may also contact market data vendors, i.e., Thompson Reuters, for historical options data. For more information, visit http://quant.thomsonreuters.com/.
A: Yes, we do offer this link to our Taxes and Investing brochure that was developed by Ernst & Young at the request of the options exchanges:
You may also call 1-888-OPTIONS to order your free hard copy.
A: The Options Expiration Calendar is available through the Options Clearing Corporation. You may view or print out a copy of the Options Expiration Calendar at the link provided. To have a complimentary copy of the Options Expiration Calendar sent to your home or business, please give us a call at 1-888-OPTIONS.
Q: During 2007, I engaged in a covered call position that has since expired with the short call not being exercised. For tax purposes, is the premium received from the sale of the call considered short-term or long-term capital gain?
A: Please be advised that OCC does not assume any responsibility as tax professionals and that all tax related question are best answered by a CPA or your brokerage firm. For your specific scenario our Taxes and Investing Guide states: “Premium received from writing a call is not included in income at the time of receipt, but it is held in suspense until the writer’s obligation to deliver the underlying stock expires. If the writer’s obligation expires, the premium is short-term capital gain to the writer upon expiration REGARDLESS of the length of time the call is outstanding.”
View the Taxes and Investing Guide (PDF)
A: Probably – depending on your brokerage firm’s policies and procedures regarding trading in Retirement Accounts. Some firms take a more liberal view of what types of trading can or cannot be made in a Retirement Account. You’ll want to find a firm that offers you the flexibility you desire. You may want to read the CBOE White Paper on the subject here:
A: Yes, you can access put/call ratios for any individual equity by entering the underlying symbol here:
You can access this data by day, week, month, or year. Please note that all values stated in these reports represent contract sides (1 side long, 1 side short).
A: Trading hours for ETFs vary. Generally, Exchange Traded Funds based on broad based indexes trade until 4:15 p.m., Eastern Time; Select Sector SPDR Funds trade until 4:00 p.m. Eastern Time; iShares Sector Funds trade until 4:15 p.m. Eastern Time; Exchange Traded Funds based on foreign stock indexes trade until 4:00 p.m., Eastern Time; HOLDRS, which are depository receipts, trade until 4:00 p.m., Eastern Time. The general rule for options on ETFs (and HOLDRs) is that they are open for trading whenever shares of the underlying ETF or HOLDRs are open in the primary market.
A: 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 instance, 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, you may find a current list (represented in shares) of the limits at:
In addition, each options exchange has its own position limit rule which can be found by clicking on their respective links at the top of the position limits page.
A: As of June 30, 2009, the top option volume day was Septermber 18, 2008 when 30,006,663 options traded.
A: Employee stock options differ in many ways from what many refer to as standardized (or “ordinary”) options. First, employee stock options are not traded on exchanges. In contrast, standard options are traded on up to nine exchanges in the United States. Second, employee stock options are not standardized, whereas exchange traded options have standardized terms, normally representing 100 shares of the underlying equity. Lastly, employee stock options generally are not transferable. Standardized options are fungible (interchangeable) and can be bought and sold during exchange trading hours on any exchange that lists them.
A: Effective Monday, February 13, 2006, options on equities, narrow-based (sector) indexes and narrow-based ETFs, will close for trading at 4:00 p.m. (ET). This is an industry-wide change and reflects a two-minute reduction in the current trading session to align options trading with the closing time of the primary market.
A: Quarterly Options (“Quarterlies”) began trading on July 10, 2006. Quarterlies 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 Quarterlies. Quarterlies may be listed on an index or an exchange-traded fund (“ETF”). You will want to visit the exchange website where the option trades to learn more.
A: On Friday, January 26, 2007, the option exchanges began a pilot program to trade options in one-cent increments. The pilot included 13 stocks and exchange-traded funds (ETFs). The one-cent ($0.01) increments are available for options with a quoted price of less than $3.00. Options with a quoted price above $3.00 are available in nickel ($0.05) increments. All IWM, SPY and QQQQ options, however, are quoted in one-cent increments..
The original pilot program consisted of the following securities:
Since its intial rollout, the penny pilot program has been expanded to include well over 350 securities. To view an excel spreadsheet of the current participants in the penny pilot program, click here.
A: Yes, cash-settled currency options are trading on two exchanges — and you can read about them here:
A: When you open a short option position, your account will be credited the premium of the option less commissions. However, to account for the position, brokerage firms generally show the short option as a negative in the account – essentially subtracting the market value of the call from the account net worth. Think of when you buy stock. You do not immediately make the amount of the purchase, rather there is a debit in the account equal to the cost of the stock plus commissions. If you started with $5,000 and purchased $5,000 worth of stock, there is a credit for the stock and a debit for the cost. The account value is still $5,000 (assuming the stock price does not change).
When shorting options (like a covered call), you are credited the proceeds and debited the option value. If the option eventually goes worthless, this debit would become zero. If the short option was not subtracted from the value of the account, the value would appear inflated. To prevent this, the market value of the short option is subtracted from the account net worth. The proceeds from the option however, are generally available to use for other investments or to remove from the account.
This should be discussed further with your broker as we can only generalize how they may be accounting for your positions.
A: The options exchanges recently amended their rules to establish a $0.50 Strike Program that allows the exchanges to list $0.50 strikes, beginning at $1 and up through and including $3.50, on up to five equity option classes whose underlying security closed at or below $3. To be eligible, an underlying stock must close at or below $3 in its primary market on the previous trading day and have a national average daily volume that equals or exceeds 1000 contracts per day as determined by The Options Clearing Corporation during the preceding three calendar months. After an option class is added to the $0.50 Strike Program, the exchanges can list $0.50 strike prices of $1, $1.50, $2, $2.50, $3 and $3.50.
Note: The participating securities may change. The current participants as of 10/22/10 include:
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