Understanding Equity Options - The Options Clearing Corporation

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The Options IndustryCouncil (OIC) is a non-profitassociation created to educatethe investing public and brokersabout the benefits and risksof exchange-traded options.Options are a versatile but complex product and that is why OICconducts hundreds of seminars throughout the year, distributeseducational software and brochures, and maintains a web sitefocused on options education.All seminars are taught by experienced options instructors whoprovide valuable insight on the challenges and successes thatindividual investors encounter when trading options. In addition,the content in our software, brochures and web site has beencreated by options industry experts. All OIC-produced informationhas been reviewed by appropriate compliance and legal staff toensure that both the benefits and risks of options are covered.OIC was formed in 1992. Today, its sponsors include BATS OptionsExchange, BOX Options Exchange, Chicago Board OptionsExchange, C2 Options Exchange, International Securities Exchange,Miami International Securities Exchange, LLC, NASDAQ OMXPHLX, NASDAQ Options Market, NYSE Amex Options, NYSE ArcaOptions and OCC. These organizations have one goal in mind forthe options investing public: to provide a financially sound andefficient marketplace where investors can hedge investment riskand find new opportunities for profiting from market participation.Education is one of many areas that assist in accomplishing thatgoal. More and more individuals are understanding the versatilitythat options offer their investment portfolio, due in large part to theindustry’s ongoing educational efforts.
Table of ContentsIntroduction 3Benefits of Exchange-Traded Options 5■ Orderly, Efficient, and Liquid Markets■ Flexibility■ Leverage■ Limited Risk for Buyer■ Guaranteed Contract PerformanceOptions Compared to Common Stocks 8What is an Option? 9■ Underlying Security■ Strike Price■ Premium■ American-Style Expiration■ The Option Contract■ Exercising the Option■ The Expiration ProcessLEAPS ® /Long-Term Options 13The Pricing of Options 14■ Underlying Stock Price■ Time Remaining Until Expiration■ Volatility■ Dividends■ Interest Rates■ Finding Option Premium QuotesBasic Equity Options Strategies 17Buying Equity Calls 18■ to participate in upward price movements■ to lock in a stock purchase price■ to hedge short stock salesBuying Equity Puts 21■ to participate in downward price movements■ to protect a long stock position■ to protect an unrealized profit in long stockSelling Equity Calls 26■ covered call writing■ uncovered call writing1
Page 4 and 5: Selling Equity Puts 30■ covered p
Page 6 and 7: The purpose of this booklet is to p
Page 8 and 9: FlexibilityOptions are an extremely
Page 10 and 11: Options Compared toCommon StocksLis
Page 12 and 13: Strike PriceThe strike price, or ex
Page 14 and 15: Exercising the OptionIf the holder
Page 16 and 17: puts. Like other exchange-traded eq
Page 18 and 19: VolatilityVolatility is the propens
Page 20 and 21: Buying Equity CallsA call option co
Page 22 and 23: e exercised and you will own 100 sh
Page 24 and 25: you to cover your position prematur
Page 26 and 27: ever, if the price increase occurs
Page 28 and 29: Selling Equity CallsAs a call write
Page 30 and 31: The $6 per share difference between
Page 32 and 33: 1) If the market price of the stock
Page 34 and 35: subsequently drops from $55 to $45
Page 36 and 37: GlossaryAmerican-style option: An o
Page 38 and 39: In-the-money: A call option is in-t
Page 40 and 41: AppendixExpiration Cycle TablesThe
Page 42 and 43: For More InformationBATS Options Ex
Page 44 and 45: Notes42
Page 46: Notes44

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