When people refer to options trading, they might actually be referring to a number of different securities. Options are traded in 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 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 that the Options Clearing Corporation (OCC) writes all options listed on the CBOE as well as other US options 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 is the Market Makers.
Fact 2: Sometimes your stock option is not being bought or sold by another option trader. 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 are no public buy and sell orders, market makers step in and put up their own capital to ensure the trade can be executed.
Fact 3: Price options are quoted 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 has to be multiplied by 100 to get the true cost of that option.
People unfamiliar with 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 it will actually cost them $200.
Fact 4: Stock options do NOT expire on the third Friday of the month in which they expire. They actually expire on the third Saturday of the expiration month, but for trading purposes, people often say they expire on Friday (since the market is not open on Saturdays).
Fact 5: When you buy a stock option, you’re not buying the property at all like you are with stock. 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 work.