When people refer to options trading, they could actually be referring to a number of different securities. Options are traded on all types of securities (forex, commodities, stocks, etc.), but for the purposes of this article I will only be referring to stock options.
Here are 5 interesting facts about options trading that most traders never realize:
Fact 1: Most people never know who actually creates stock options. Heck, I traded for years before I found out that the Options Compensation Corporation (OCC) issues all options listed on the CBOE, as well as other US options exchanges.
The OCC ensures that the options market remains liquid and that there is always a buyer and a seller for each transaction. Another party that helps facilitate this liquidity is the Market Makers.
Fact 2: Sometimes your stock option is not being bought or sold by another option trader. Market makers are members of the exchange who help keep the market liquid by using their own money to buy and sell options.
So when there are no public buy and sell orders, the market makers step in and put up their own capital to ensure the trade can be executed.
Fact 3: Price options are listed at their price per share, but are actually only sold in lots of 100 shares. So what that means is that any price you see quoted needs to be multiplied by 100 to get the actual cost of that option.
People who are unaware of how stock options work may look at a quoted price of $2 and then get excited thinking they can buy that stock option for $2 when it will actually cost them $200.
Fact 4: Stock options do NOT expire on the third Friday of the month in which they expire. Actually, they are due on the third Saturday of the expiration month, but for business purposes, people usually indicate that they are due on Friday (since the market is not open on Saturdays).
Fact 5: When you buy a stock option, you’re not buying ownership in anything like you are with stock. The only thing you are buying is a contract that gives you certain “rights.”
In the case of a call option, you are buying the “right” to buy a stock and with put options, you are buying the “right” to sell a stock.
Options trading can be confusing at first, but take your time, keep learning, and eventually things will start to work out.
