When people refer to options trading, they could actually be referring to several different securities. Options are traded on all types of securities (forex, commodities, stocks, etc.), but for the purposes of this article I will only refer to stock options.
Here are 5 cool facts about options trading that most traders never realize:
Fact 1: Most people never know who actually creates the stock options. Heck, I’ve traded for years before finding out that Options Clearing Corporation (OCC) issues all of the options listed on CBOE, as well as other US option exchanges.
The OCC ensures that the options market remains liquid and that there is always a buyer and a seller for every transaction. Another party that helps facilitate this liquidity are the Market Makers.
Fact 2: Sometimes it is not another options trader who buys or sells your stock option from / to you. Market Makers are members of the exchange who help maintain market liquidity by using their own money to buy and sell options.
So, when there is an absence of public purchase and sale orders, Market Makers step in and contribute their own capital to ensure that the operation can be executed.
Fact 3: Pricing options are traded at their price per share, but are actually only sold in lots of 100 shares. So what that means is that whatever price you see quoted needs to be multiplied by 100 to get the true cost of that option.
People who don’t know how stock options work can look at a listing price of $ 2 and then get excited that they can buy that option for $ 2 when it will actually cost them $ 200.
Fact 4: Stock options do NOT expire on the third Friday of the month they expire. They actually expire on the third Saturday of the expiration month, but for business purposes, people often indicate that they expire on Friday (since the market doesn’t open on Saturdays).
Fact 5: When you buy a stock option, you are not buying ownership of anything like you are buying stocks. 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 share and with put options you are buying the “right” to sell a share.
Options trading can be confusing at first, but take your time, keep learning, and eventually things will start to fall into place.