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 purpose 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 the Options Clearing Corporation (OCC) issues all listed options at the CBOE as well as other U.S. option exchanges.
The OCC ensures the options market stays liquid and that there is always a buyer and seller for every transaction. Another party that helps facilitate this liquidity are Market Makers.
Fact 2: Sometimes it’s not another options trader who buys or sells your stock option from/to you. Market Makers are exchange members who help keep the market liquid by using their own money to buy and sell options.
So when there is an absence of 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: The price options are quoted at is their per share price, but they are only actually sold in 100 share batches. So what that means is that whatever price you see quoted has to be multiplied by 100 to get the true 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 in all actuality it will cost them $200.
Fact 4: Stock options do NOT expire the third Friday of the month of their expiration. They actually expire the third Saturday of the month of expiration, but for trading purposes people usually state that they expire on Friday (since the market is not open on Saturday).
Fact 5: When you purchase a stock option you’re not purchasing ownership in anything like you are with stocks. The only thing you are purchasing is a contract that grants you certain “rights”.
In the case of a Call option you are purchasing the “right” to buy a stock and with Put options you are purchasing 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 come together.