In 1973, the first year that options were listed, investors could write or purchase calls on 16 different stocks. Puts weren’t available until 1977. Today the field of option choices has widened considerably — as of 2016, investors can buy or write calls and puts on over 4,000 different stocks ETFs, and stock indexes.
The most frequently traded options, or those with the greatest volume, are those on broad-based stock ETFs and on individual stocks issued by large, widely held companies. It’s generally quite easy to find current information about those ETFs and companies, making it possible for investors to make informed decisions about how the price of the underlying is likely to perform over a period of months — something that’s essential to options investing. These options may also be multiply listed, or traded on more than one exchange.
Listed and unlisted options
Options aren’t listed on every stock, and each exchange doesn’t list every available option. The Securities and Exchange Commission (SEC) regulates the standards for the options selection process, and beyond that, exchanges can make independent decisions. There are some rules, though. On every options exchange, a stock on which options are offered must:
- Be listed and traded on the National Market System
- Have a specified minimum number of shareholders and shares outstanding
- Have a specified minimum average trading price during an established period of time
In addition to those minimum qualifications, stocks are chosen based on the stock’s volatility and volume of trading, the company’s history and management, and perceived demand for options. This subjective component to the decision-making process explains in part why some exchanges may choose to list an option while others do not. In general, options are available on the most well-known, publicly traded companies, since those are the stocks that are most likely to interest options investors. Although companies are not responsible for options being listed on their stocks, most companies welcome the listing of options, since historically a stock’s trading volume tends to rise after a new options class is issued on that stock.
Getting off the list
It’s possible for exchanges to decide to delist options, or remove them from the trading market. If the trading volume for an option remains low for a long period of time, an exchange may decide that a lack of investor interest in that option makes it not worth listing. In addition, exchanges must delist options if they fail to meet certain criteria. In general, options that have already been listed on a particular stock at the time that option is delisted may be traded until they expire. No new expiration months will be added on that class.
Index options, which were introduced in 1983, are also popular with individual investors. The underlying instrument is an index instead of a single equity. Because they track the prices of many component stocks, equity indexes can reveal a movement trend for broad or narrow sectors of the stock market. The S&P 500 index tracks 500 large-cap US stocks, for example, while the Dow Jones Utility Average, an index of 15 utility companies, is used to gauge the strength or weakness in that industry. Unlike options on stock, index options are cash-settled, which means that upon exercise, the writer is obligated to give the holder a certain amount of cash. The total settlement is usually $100 times the amount the option is in-the-money.
For example, if you exercised a 90 call on the DJIA when the index is at 9300 and DJX is at 93, you’d receive $300 (or 3 x $100), before fees and commission. Index options can be more expensive than stock options, but they may offer more leverage and less volatility.
While the most popular options are those offered on individual stocks, ETFs, and stock indexes, contracts are also available on limited partnership interests, American Depository Receipts (ADRs), American Depository Shares (ADSs), government debt securities, and foreign currencies. Many debt security and currency options transactions are initiated by institutional investors. More recently, retail investors have begun to trade cash-settled foreign currency options.
The total number of options trades that takes place each year has grown dramatically, as have the variety of available options. On the first day of trading, there were 911 transactions on the 16 listed securities. Today, an average daily volume might be close to one million on a single exchange. In 1973, 1.1 million contracts changed hands. In 2009, the year’s total volume was more than three billion contracts on the seven exchanges that were operating. In 2015, that number increased to over 4.2 billion contracts.
On Which Securities Are Options Offered? by Inna Rosputnia
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