Criterias to list stock options – Option Trading FAQ

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Criterias to list stock options

Q: Why do some stocks have options for trading while others don’t?

A: To have options on their stock traded on options exchanges, companies must meet the following criterias.

  1. The company must have a mimimum of 7,000,000 publicly held shares outstanding.
  2. The stock must be listed on the NYSE, Nasdaq, AMEX or any national stock exchange..
  3. For the past 5 trading days, the closing price of the stock must have a minimum per share price for a majority of trading days. This means that IPO issues cannot have options traded on them until 5 days after the initial public offering date.
  4. There must be at least 2,000 shareholders in the company.

Option exchanges will not allow any option to be traded for a particular stock if the company fail to meet any of the above criteria.

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Writing Puts to Purchase Stocks

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What’s Required for a Stock to Trade as an Option?

Despite being around for nearly 40 years, options contracts have only recently become really popular. The Chicago Board Options Exchange, the world’s largest options market, opened its doors in 1973; on the first day, just over 900 contracts exchanged hands on just 16 stocks. At the turn of the 21st century, the total volume of options contracts on U.S. exchanges was around 500 million, and as of the end of 2020, the Options Clearing Corporation, the world’s largest derivatives clearinghouse, reported clearing nearly 4.5 billion contracts for the year. Investors have discovered the huge cost efficiency in using the leveraging power of options to increase their potential returns and hedge their risks.

Popularity notwithstanding, there are additional risks involved in options, so options exchanges have put certain requirements in place before a company’s stock can be listed for options contracts. Individual companies have no say on whether or not their stocks are listed on the options exchange; the decision to list equity options for a particular equity is entirely at the discretion of the exchanges themselves.

Under CBOE rules, there are four criteria a publicly company must meet before options on its stock can be traded on the options exchange:

  1. The underlying equity security must be listed on the NYSE, AMEX or Nasdaq.
  2. The closing price must have a minimum per-share price for a majority of trading days during the three prior calendar months.
  3. The company must have at least 7,000,000 publicly held shares.
  4. 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.

Options have a reputation for being riskier or more dangerous than regular stock transactions, but the truth is that options, used judiciously, can actually be used to reduce risk. They can even be less risky than equities in certain situations because the financial commitment is lower—and they are a very dependable hedge when a stop-loss order is placed. And for strategic investors, options open up a variety of alternatives to meet their investment goals through the use of synthetic options.

How can I identify stocks that also trade as options?

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 beginning option traders quickly discover that not all securities have an option chain associated with them. This means there may be no options available to buy or sell on a certain security, leaving the investor no choice but to buy or sell the underlying instrument to get 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 publicly 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. (To learn more about this subject, see our article: What requirements must a company meet before exchanges will allow options on the company to be traded?)

The easiest way to find out which securities have 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. The exchange listing has grown tremendously in recent years, with current primary operations at Boston Options Exchange (BOX), CBOE – including CBOE 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) and NYSE 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 CBOE Exchange 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 the Options 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 $10 strike price may only cost $0.50, or $50 since one option controls 100 shares ($0.50 x 100 shares). If the shares move up to $11 the option is worth at least $1, and the options trader 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 are out of the money at the time of their expiration, they become worthless and the trader loses the premium they paid for the option.

Another popular equity options technique is trading option spreads. Traders take combinations of long and short option positions, with different strike prices and expiration dates, for the purpose of extracting profit from the option premiums with minimal risk.

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