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Characteristics of Stock Options

An options contract that most people buy and sell is usually a standard contract that has some specific characteristics. The list below describes equity options specifically. The Options Clearing Corporation (OCC) puts out a booklet that describes the following (and more) in excruciating detail. If you want, you can torture yourself here.

  • The rights of the holder – Whether the option is to buy (call) or to sell (put) the underlying asset

  • Quantity of underlying – How many shares each contract is worth. Contracts are usually for lots of 100 shares.

  • The strike price – The price at which the option can be exercised. Usually denoted K for strike, although in older books this is still called X.

  • The expiration date – The date on which the option will no longer be active. Generally the third Friday of some month. Most stocks stagger their options (in other words you won’t likely see options expiring in March and April for the same stock). Index options are an exception but those aren’t equity options by definition. (As an aside, index options are nice to play in the US due to favorable tax treatment. See IRS Section 1256 for details about the 60/40 rule, among others).

  • Settlement – The standard options contract requires delivery of the underlying asset. So if you sell a put option and can’t find stock to deliver, you are royally screwed. (Example: read about the squeeze on E. L. Bruce in the Darvas book. Note: if you read William O'Neil's book, you'll find he was also in on E. L. Bruce. What he doesn't tell you is why it went up so much! Now you know...).