standard 100 shares feature the number 7 at the end of the symbol to distinguish them from standard listed options. Mini options are aimed at investors who have smaller positions but who want to reduce their risks based on the smaller number of shares in their possession.
Here is an example of the symbol for an Apple Inc. (Nasdaq: AAPL) 76.43 call option that expires on June 13, 2014:
AAPL061314C00076.430
For a mini option of the same underlying stock, expiration date, and striking price, the symbol would be:
AAPL7061314C00076.430
Turning with the expiration cycle
There are three expiration cycles, as listed in Table 2-1. All options feature at least four expiration dates throughout the year based on one of these cycles. Some listed options, such as those linked to important index tracking ETFs, have expiration dates every month. Long-term options (Long-term Equity Anticipation securities, or LEAPs) also have monthly expiration dates.
Table 2-1 Option Expirations by Cycle
All options have at least four monthly expiration dates available at all times. Each option features at least the current month and the following month expiration dates. For example, an option that runs with the January cycle also has a February expiration date while the next expiration will be in April, its normal cycle month. This option would also have July available, making four months of expiration dates available for trading. When January expires, February is the near month, so March options become available, along with April and July options. When February expires, October options then come online making four months of expiration dates and rounding out the cycle. The cycle repeats as the near month expires.
Option strike prices are generally available in increments of 0.50, $1, $2.50, and can be as high as $10, depending on the price of the underlying stock. There are exceptions to this general tendency, which becomes especially noticeable after pricey stocks split. That was the case with Apple in June 2014, which is why the strike price in the earlier example was peculiar. Most of the time, this is not the case.
Options expiration is decision time
If you have an open option position, you should have a good idea about what you will do with it well before it expires. Here are your choices:
✔ Taking advantage of your rights as a contract holder: This means you are exercising the option. It requires contacting your broker and submitting the exercise instructions. Chapter 9 covers this in detail.
✔ Trading out of the option: This means submitting to your broker the instructions required to exit the position.
Here are some key details about expiration dates and how to handle them:
✔ Know your last trading day: There is no stock market trading on Saturday, which has been the traditional last trading day. This won’t as be meaningful for options expirations after February 2015, though, when Saturday expirations begin to phase out. Some options, depending on their own particular properties and issue dates, retain the Saturday last trading day date. But over time, they expire, and eventually all options have last trading days on Friday.
✔ Keep up with your last exercise day: The last trading day and the last day to exercise usually fall on the same day. In most cases, you have one hour after the market closes to submit your instructions to your broker. But some brokers may have different rules, thus it’s important to check and know this well before you make any trading or exercise plans.
Detailing your rights
When you buy a call option, you are buying the right, but not the obligation, to buy a specified amount of stock at a certain price (strike price) at any time (just about) before the expiration date. This right lets you either exercise your right or trade out of the position.
When you buy a put option, you are buying the right, but not the obligation, to sell a specific amount of stock at a specific price (strike price) at any point in time (just about) up to the option’s expiration date. During this defined period of time, you can exercise your rights as an option holder or decide to trade out of the position.
It is quite possible that you may never actually exercise an option, as the option position may be part of an overall trading strategy you have devised. That’s the beauty of options, you have rights which give you the choice to act in the way that makes the most sense based on your strategy and market conditions. However, if you decide to exercise an option, here are some advantages:
✔ Exercising a call option: When you exercise a call option, you may benefit from the shareholder rights of the underlying stock. This could mean that you receive cash or a dividend or that you participate in the benefits of other corporate actions such as mergers, acquisitions, and spinoffs.
✔ Exercising a put option: Exercising a put option lets you exit a stock position. This could come in very handy when a company releases bad news after the close of regular trading in the stock market.
Exercising either a call or a put option: This practice may be of help in minimizing commission costs. By selling the option and then buying or selling the stock in the open market, you generate an added commission.
Even though the last bullet sounds confusing, there are times when selling the rights inherent in an option, to buy a stock in the open market, makes sense from a profit and commission savings standpoint. Chapter 9 covers this strategy in detail.
There is an important difference between what it takes to issue new shares of stock and how options contracts come to exist. The number of shares available to trade in a particular stock is called the float. If there is a need for more stock to be issued, shareholders vote on whether it is sensible or not to do so, and the company goes through a process of registration before the new shares are offered to the public.
It’s different with options, where the potential number of contracts possible is limitless because options contracts are offered based on demand. The actual number of existing contracts for any option is known as the open interest.
Opening and closing positions
When you enter your order to buy an
