Can options be
traded on any listed stock?
By the standards established by the options exchanges, options can
only be listed on securities meeting all the following criteria at
the time of listing:
The underlying equity must be listed on
the NYSE, Amex, any national stock exchange or Nasdaq National
Market.
The closing stock price must have a
minimum price per share for a majority of the trading days
during at least five trading days.
There must be at least seven million
publicly-held shares outstanding excluding shares held by
directors or holders of 10% or more of the underlying equity
shares. (e.g. the public “float” must be seven million or
more.)
There must be at least 2,000
shareholders.
Generally, there would be a minimum of
five days from the IPO date before options could be listed on any
stock, but this criteria alone would not guarantee listing.
What is
open interest?
Open interest reflects the total number of option contracts for a given option
series which have been opened but not yet closed out. This indicates neither a
bullish or bearish outlook. For example, if there is no existing open interest
and you buy one contract from another customer, and no more trading occurs,
the open interest in that series would be reported as one (1) contract. That
open interest reflects one call seller (bearish) and one call buyer (bullish).
Is that bullish or bearish? Most people would agree that the number is neutral
and does not reflect any bullish or bearish sentiment.
What
does liquidity mean?
Liquidity refers to the availability of stock near the last sale price. When
the bid-ask on an option is wider than "normal," it usually means that the
market-makers are not sure where they can reliably buy or sell shares of the
underlying stock to hedge possible option transactions. Sometimes that means
that the stock is more volatile, but not always. It is possible, for example,
to have a volatile stock that is very liquid, meaning that there are usually
lots of stock shares to buy or sell at prices near the last sale. In that
case, the options' bid-ask would most likely be narrow. When the market in an
option is narrow, it may mean that shares of the underlying stock can either
be bought or sold in quantity near the last sale price or the option itself
has a lot of buyers and sellers near the last sale price of the option.
Usually if an option is liquid, the underlying stock is also liquid.
How do I select the proper strike price when I purchase an option?
A good method of analyzing all the potential strike price selections is to use
a spreadsheet. Put the strike prices across the top row, the current price of
each option in the 2nd row, and the range of potential stock at expiration in
the leftmost column. Then you can plot a grid of percent return on each option
to expiration given a range of prices for the stock. This should give you a
good idea of the risk-reward ratio for the various strikes.
What do "Buy to Open" and
"Sell to Close" mean?
Those designations refer to your positions - long or short contracts. If an
investor has no previous position in an option contract, any purchase would be
"to open". Hence, a "buy to open" order. If the investor is increasing a
position that they already have, that would be "opening" too. Conversely,
should an investor wish to close or decrease an existing position, that order
would be entered as a "closing" transaction.
An excellent first read on the subject,
this book carefully and completely defines the terminology, explains options
investing step by step, and presents strategies so that it is easy to understand
at each level of risk involved.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
