Before you trade or invest, it’s important to know the contract specifics—multipliers, delivery specifications, and tick sizes.
When trading stock, knowing the amount of capital you’re investing is as straightforward as multiplying the price of the stock by the amount of shares being traded. But when you trade listed derivatives, such as options and futures, the calculation is not always that simple. Although there are some standard parameters, each product has its own set of specifications. Before you trade or invest in anything, it’s important to know the contract specifics—multipliers, delivery specifications, minimum price fluctuation (aka “tick size”)—because that is the only way to fully assess your risks and potential profit and loss.
Here are a few things you should know about those contract specifications.
If stocks might be the simplest to comprehend, standard equity options might be just one step up. A standard equity option contract (call or put) is based on physical delivery of 100 shares of stock. The option prices are quoted in decimals, so every .01 equals $1.00. To convert the price of an option into dollars, just multiply by 100 (or, as option traders do when looking for a quick conversion, just move the decimal two places to the right). To illustrate, if you bought 2 contracts of a call option in XYZ for $1.50, it would actually cost you $300 (plus transaction costs).
# of Contracts x Option Price x 100 = Trade Cost (plus transaction costs)
2 x $1.50 x 100 = $300
U.S. equity options are American style, meaning they may be exercised any business day before, and including, the expiration date. Knowing when your option expires is important, so don’t let it sneak up on you.
Options on some broad-based equity indices, such as the S&P 500 Index (SPX), Dow Jones Industrial Average (DJX), NASDAQ 100 Index (NDX) and the Russell 2000 Index (RUT) have a couple key differences:
1. Cash-settled, not physically-settled - Instead of receiving or delivering 100 shares per contract upon exercise or assignment, these contracts are settled in cash. Specifically, an amount equal to the difference between the settlement value of the underlying index and the strike price of the option being exercised or assigned, times the contract multiplier of $100. Why $100? The contract size of these index options is $100 times the index value. Although some index options settle a bit differently than standard equity options, there’s still that “multiply by 100” thing.
2. European style - You can only exercise an option on its expiration date, not before.
A tick is the minimum allowable price change for a given security. For most equity options priced under $3.00, the tick size is $0.05, and $0.10 for all options greater than $3.00. This means that an option that is $0.95 bid and offered at $1.05, can only be quoted in $0.05 increments. There is a group of actively traded stocks whose options trade in penny increments. TD Ameritrade clients can find the list of symbols on the thinkorswim platform by going to the MarketWatch tab, select Quotes, and from the dropdown, choose Public (G-R) and then Penny Increment Options. See figure 1 below.
FIGURE 1: PENNY INCREMENT OPTIONS
To see a list of options quoted in penny increments in the thinkorswim platform from TD Ameritrade, under the MarketWatch go to Quotes >Public (G-R) > Penny Increment Options. For illustrative purposes only.
When it comes to multipliers, equity and equity index options are just the beginning. Futures contracts, and the options based on them, come in all shapes and sizes. Some are cash settled; some are physically settled. Some have contract sizes that are nice round numbers, and quoted in dollars and cents; some are quoted in fractions. Though there are many different multipliers in the futures world, they’re based on contract size, and it’s the contract sizes that tend to differ. Here are a few nuggets:
Many futures tick sizes and values can be accessed on the thinkorswim platform by going to the Trade tab > All Products. Then, click on the dropdown box next to the symbol box, and select Futures. See figure 2 below.
FIGURE 2: FUTURES TICK SIZES, VALUES
In the thinkorswim platform, click the Trade tab > All Products > Futures. For illustrative purposes only.
Knowing your contract specifications—the multiplier, contract and tick size and delivery terms—can be important for any trader or investor. You should educate yourself before that first trade. If you’re a stock trader venturing into options for the first time, it may be as straightforward as shifting two decimal places to the right to account for the multiplier of 100. But be aware that if the underlying stock has gone through some kind of a reorganization such as a stock split or stock dividend, the multiplier may increase or decrease depending on the terms, and will affect the debit or credit calculation. If you’re considering futures or even options on futures, it may require a deeper look into the contract specs.
Go to tradewise.com and enter coupon code "ticker" at checkout.
Start your free trial
When the two months have passed, keep the TradeWise service for just $20 per strategy per month
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
*Select any two trading
strategies and receive them for two full months—an $80 value. If you want to keep the tips coming, it’s only
$20 per month, per strategy. If you do not cancel, you will be charged $20 per
strategy per month. For more information about TradeWise Advisors, Inc., please
see the Disclosure Brochure (ADV Part
2A). Limit one TradeWise registration per account.
TradeWise Advisors, Inc.
and TD Ameritrade, Inc. are separate but affiliated firms. Advisory services
are provided exclusively by TradeWise Advisors, Inc. and brokerage services are
provided exclusively by TD Ameritrade, Inc. For more information about
TradeWise, please see ADV 2
TradeWise strategies are not intended for use in IRAs, may not be
suitable or appropriate for IRA clients, and should not be relied upon in
making the decision to buy or sell a security, or pursue a particular
investment strategy in an IRA.
Futures trading is speculative, and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products. Futures trading services provided by TD Ameritrade Futures & Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.
Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.