The trading of options has become increasingly popular among retail investors as they become aware of the different ways that options can be used to generate profits. The interesting thing about option strategies is that investors can use them in all types of market conditions. The primary question becomes: Which securities should be used when implementing a certain strategy?
Key Takeaways
- Trading options on stocks can be used in versatile ways, from hedging and spreading to speculation.
- Not all stocks, however, have listed options available for trading.
- You can determine if a stock has listed options by checking with your broker, with an options exchange, or with the options industry council.
Stocks With Options on Them
Many beginningoption traders quickly discover that not all securitieshave an option chain associated with them. This means there may be no options available to buy or sell on a certain security, leavingthe investor no choice but to buy or sell the underlying instrument toget exposure.
Exchanges require minimum listing criteria to be met before they will add options. For instance, Under rules established at the Chicago Board Options Exchange (CBOE), there are four criteria a public company must meet before options on its stock can be traded on the options exchange:
- The underlying equity security must be listed on the NYSE, AMEX, or Nasdaq.
- The closing price must have a minimum per-share price for a majority of trading days during the three prior calendar months.
- The company must have at least 7,000,000 publicly held shares.
- The company must have at least 2,000 shareholders.
If a company does not meet any one of these criteria, options exchanges such as the Chicago Board Options Exchange will not allow any options to be traded on the underlying security. Additionally, because of the second condition listed above, a company cannot have options traded on it until at least three months after its initial public offering date.
The easiest way to find out which securitieshave options is to check directly using your broker, which is particularly easy if you use an online broker. Many of these platforms have an options chain or options series function that allows you to look up the options on a stock, if there are any.
You can also visit the websites of the exchanges where the majority of equity options are traded. Theexchange listing has grown tremendously in recent years, withcurrent primary operations atBoston Options Exchange (BOX),CBOE—includingCBOE BZX, C2, and EDGX Options Exchanges;MIAX and MIAX PEARL Options Exchanges,Nasdaq BX, MRX and GEMX Options; the International Securities Exchange (ISE); The Philadelphia Stock Exchange (PHLX),NYSE American Options (AMEX) andNYSE Arca Options.Each website has a directory of options that are available for trading on that given exchange. For example, you can click here to go to the symbol directory for options listed on the CBOEExchange Inc.
The Options Industry Council (OIC) is another resource for finding options series. The OIC is a cooperative formed in 1992 by U.S. options exchanges and theOptions Clearing Corporation(OCC) to educate investors and financial advisers regarding the benefits and risks of exchange-traded equity options.
Using Equity Options
Equity options are derived from a single equity security. Investors and traders can use equity options to take a long or short position in a stock without actually buying or shorting the stock. This is advantageous because taking a position with options allows the investor/trader more leverage in that the amount of capital needed is much less than a similar outright long or short position on margin. Investors/traders can, therefore, profit more from a price movement in the underlying stock.
For example, buying 100 shares of a $10 stock costs $1,000. Buying a call option with a $10strike pricemay only cost $0.50, or $50 since one option controls 100 shares ($0.50 x 100 shares). If the shares move up to $11the option is worth at least $1, and the optionstrader doubles their money. The stock trader makes $100 (position is now worth $1,100), which is a 10% gain on the $1,000 they paid. Comparatively, the options trader makes a better percentage return.
If the underlying stock moves in the wrong direction and the options areout of the moneyat the time of their expiration, they becomeworthless and the trader loses the premium they paid for the option.
Another popular equity options technique is tradingoption spreads. Traders take combinations of long and short optionpositions, with different strike prices and expiration dates, for the purpose of extracting profit from the option premiums with minimal risk.
