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Q: What is a stock option?
A: A stock option is a contract that gives the owner the right, but not the obligation, to buy or sell a particular stock at a fixed price (the strike price) for a specific period of time (the expiration date). The contract also obligates the seller or writer to meet the terms of delivery if the contract right is exercised by the owner.
Q: What is a call?
A: A call is an option contract that gives the owner the right to buy the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For example, an American-style XYZ Corp. July 60 call entitles the buyer to purchase 100 shares of XYZ Corp. common stock at $60 per share at any time prior to the option's expiration date in July. For a call option writer, or seller, the contract represents an obligation to sell the underlying stock if the option is assigned.
Q: What is a put?
A: A put is an option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For example, an XYZ Corp. July 60 put entitles the owner to sell 100 shares of XYZ Corp. common stock at $60 per share at any time prior to the option's expiration date in July. For the writer, or seller, of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned.
Q: What do the terms American-style and European-style mean when referring to options?
A: An American-style option may be exercised at any time prior to its expiration. A European-style option may be exercised only during a specified period before the option expires. Currently, every European-style option is exercisable only on its expiration date.
Currently, all exchange-traded equity options are American-style. Most index options are European-style. I would check each index product that you are interested on trading to verify, among other things, the options exercise style.
Q: How do read options quotes?
A: An options' quote will typically offer the following information:
Last - Indicates an options' last reported sales price.
Net - An options' net price change on the day. In the event the "Net" column displays a 'pc', no transactions have been reported for the current trading day, thus there is not a reported price change.
*Bid - The highest price any one is willing to pay for the options contract.
*Ask - The lowest price any one is willing to receive for the options contract.
Volume - Displays the volume (in options contracts) that has traded for the current day.
*The options market is quote driven. It is possible, for example, for an options contract to go several minutes, days or even weeks without trading. Although there have not been any trades, it is likely that an options' quotes have been updated many times during the trading day. Specialists and market makers on the trading floor are regularly updating and refreshing options quotes (the options' bid and asks) to reflect changes in the underlying security price, volatility or overall market conditions.
Q: How do LEAPS� differ from conventional options?
A: LEAPS or Long-term Equity AnticiPation Securities are options, both calls and puts, with expirations as far out as two and one-half years. Conventional options will typically offer contracts with expirations up to nine months in the future. Currently, equity LEAPS will have two series at any time with January expirations. For example, in August 2002, LEAPS for a particular stock might be available with expirations of January 2004 and January 2005. Since equity LEAPS expire only in January of these years, these LEAPS will have different options "root symbols" to distinguish one year from another.
Q: How do I find a broker?
A: Talk with potential sales people at several firms. Ask each sale representative about his or her investment experience, professional background, and education.
Investors can find out about the disciplinary history of any brokerage firm and sales representative by calling 1-800-289-9999, a toll free hot line operated by the National Association of Securities Dealers, Inc (NASD). The NASD will provide information on disciplinary actions taken by securities regulators and criminal authorities. State securities regulators also can tell you if a sales representative is licensed to do business in your state.
You will want to understand how the sales representative is paid; ask for a copy of the firm's commission schedule. Firms might pay sales staff based on the amount of money invested by a customer and the number of transactions done in customer's account. More compensation may be paid to a sales representative for selling a firm's own investment products. Ask what fees or charges you will be required to pay when opening, maintaining, and closing your account.
Determine whether you need the services of a full service or a discount brokerage firm. A full service firm typically provides executions services, recommendations, investment advice, and research support. A discount broker generally provides execution services and does not make recommendations regarding which securities you should buy or sell. The charges you pay may differ depending on what services are provided by the firm.
Q: What is an Exchange?
A: In the financial markets, an exchange refers to a securities exchange where stocks, options and/or futures contracts are traded by members of the exchange or their own accounts and the accounts of their customers. These exchanges are registered with and regulated by the Securities and Exchange Commission (SEC). The five U.S. exchanges that list and trade equity, ETF and index options contracts are:
The American Stock Exchange (AMEX)
The Chicago Board Options Exchange (CBOE)
The International Securities Exchange (ISE)
The Pacific Exchange (PCX)
The Philadelphia Stock Exchange (PHLX)
Q: What is the Options Disclosure Document?
A: Known as The Characteristics and Risks of Standardized Options, this booklet has been written to meet the requirements of an SEC rule that requires the U.S. options markets to prepare, and brokerage firms to distribute, a booklet that briefly and generally describes the characteristics of options and the risks to investors of maintaining positions in options. Prior to buying or selling an option, investors must read a copy of this disclosure document. It explains the characteristics and risks of exchange traded options. You may download this document in pdf format, or order a free brochure by contacting an Options Industry Services representative at 1-888-OPTIONS (678-4667), Monday - Friday, 7:30 a.m. - 5:00 p.m. CST.
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