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Q: Can options be traded on any listed stock?
A: 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 or Nasdaq.
- The closing stock price must have been at least $7.50 per share for a majority of the trading days during the three prior calendar months.
- There must be at least seven million publicly-held shares outstanding.
- There must be at least 2,000 shareholders.
- Generally, it would be a minimum of three months from the IPO date before options could be listed on any stock.
Q: Is increased open interest bullish?
A: You should keep in mind that open interest only 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.
Q: On a recent trading day, the volume of options traded on a specific contract was about 3,000, yet the next day open interest had only increased by approximately 1,800. How can that be?
A: I've put together a little chart that you might find helpful. The fact is, that to accurately reflect open interest we need to know if the buyer AND the seller are opening or closing positions. (Example is assuming 1 contract in the trade.)
| to open |
+ |
to open |
|
increases by 1 |
| to open |
+ |
to close |
|
no change |
| to close |
+ |
to open |
|
no change |
| to close |
+ |
to close |
|
decreases by 1 |
|
As the above table illustrates, the impact on open interest depends on whether the buyer and seller are opening or closing positions. The answer to your question is that only after the end of the day, when opening and closing positions are cleared and "paired up" can the new open interest be reported.
Q: What does liquidity mean?
A: 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.
Q: How do I select the proper strike price when I purchase an option?
A: 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.
Q: Is there a free source for historical option prices?
A: One free source that currently offers historical prices for non-expired options is located at www.wallstreetcity.com. The website provides a daily high, low, close and volume for equity and index options.
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