Option Contract Specifications

Posted on February 12th, 2010 admin No Comments

Contracts

The Australian Exchange Traded Options (ETO) usually have 1000 share per contract. Some shares can have a different contract size for instance 1060. This may be due to a corporate action such as a stock split or consolidation. Option contracts also vary depending on the different national exchanges, for example options in the USA have 100 shares per contract. Similarly the contract size changes for different types of assets, for instance gold future options are based on the number of ounces per contract.

Expiration

The ETO options expiration date is usually the last Thursday of every month. Index options expiry is usually the second last Thursday of every month. When placing an options trade you should always confirm the expiration date.

Strike Price

The strike price is the price at which you have the right to buy the underlying shares. Most traders would not exercise the option because they could sell their option for the same gross profit but with less transaction costs, therefore greater net profit. Also if you close the position before expiry there will also be some time value in the option and therefore greater profit than at expiry. However, if using options to manage your share portfolio you may want to buy/sell the stock at the strike price.

Option Premium

The premium is the price of an option.

Option Type

There are two types of options: American style options and European style options. American options can be exercised anytime until expiry. All options on the ASX that are on shares are American style options. European options can only be exercised at expiry and these are the index options (e.g. XJO options).

Exercises

When an option is exercised they are settled with physical delivery of the underlying asset. For example Australian ETOs are settled by physical delivery of shares. Whereas, index options are settled by physical delivery of cash. This is because it is unable to take physical delivery of the index. To take delivery of the index you would have to buy every share in the index which is not realistically possible or cost effective.

Example:

Buy 2 contracts BHP Mar 2009 3000 Calls @ 120

• “Buy” determines it is a bought option

• “2 contracts” means exposure to 2000 shares

• “BHP” is the underlying asset

• “March 2009” is the expiration date of the option

• “3000” refers to 3000 cents or $30.00 which is the strike price

• “Calls” determines it is a call option

• “120” refers to 120 cents or $1.20 which is the premium to buy this option. So the person would have paid 2000 multiplied by $1.20 = $2,400 for this option.


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