Options contract terms differ by product type. Know the difference between options multipliers, tick sizes, and delivery terms before you trade or invest.
You don’t check the water in the middle of a swan dive. You don’t enter an intersection unless you know the exit is clear (in most cities, anyway), and you don’t buy or sell an options contract without knowing the terms of that contract. That means understanding the multiplier, delivery terms, tick sizes, and other contract specs.
Look before you leap.
When trading stocks, knowing the amount of capital you’re investing is about as straightforward as it gets: You multiply the price of the stock by the number of shares involved. But when you trade listed derivatives, such as options and futures, the calculation is not always that simple.
Sure, there are some standard parameters—but each product has its own set of specifications. Before you trade or invest in derivative products like options and futures, it’s important to know the contract specifics—multipliers, delivery specifications, and minimum price fluctuation (aka “tick size”)—because that’s 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 may be one step up. A standard equity options contract (call or put) is usually based on physical delivery of 100 shares of stock (although sometimes the number of shares of stock an options contract delivers may not be 100). The options prices are quoted in decimals, so every .01 equals $1.00. To convert the price of an option into dollars, just multiply by 100, even for contracts that don’t deliver 100 shares (or, as option traders do when looking for a quick conversion, move the decimal two places to the right).
The multiplier formula for equity options is straightforward:
# of Contracts x Options Price (in dollars) x 100 = Trade Cost (plus transaction costs)
If you bought two contracts of a call option in XYZ for $1.50, it’d actually cost you $300 (plus transaction costs).
2 x $1.50 x 100 = $300
U.S. equity options are American-style options, meaning they may be exercised any business day before, and including, the expiration date. Knowing when your option expires is important, so don’t let it sneak up on you.
Options on some broad-based equity indices, such as the S&P 500 Index (SPX), Dow Jones Industrial Average ($DJI), Nasdaq-100 Index (NDX), and the Russell 2000 Index (RUT), have a couple key differences:
A tick is the minimum allowable price change for a given security. For most equity options priced under $3, the tick size is $0.05, and it’s $0.10 for all options greater than $3. This means that an option that’s $0.95 bid and offered at $1.05 can only be quoted in $0.05 increments. There’s a group of actively traded stocks whose options trade in penny increments. To find the list of symbols on the thinkorswim® platform, go to the MarketWatch tab, select Quotes, and from the menu choose Public (G-R) and then Penny Increment Options. See figure 1.
FIGURE 1: WHICH OPTIONS TRADE IN PENNY INCREMENTS? It’ll be actively traded stocks, and you can find them on thinkorswim by selecting MarketWatch > Quotes > Penny Increment Options. Chart source: The thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results.
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 are 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, and there are two ways:
FIGURE 2: FUTURES FUNDAMENTALS. You can also pull up contract specs and contract profiles for options on futures by selecting Analyze > Fundamentals and typing in a futures contract symbol. For illustrative purposes only. Past performance does not guarantee future results.
FIGURE 3: FUTURES CONTRACT SPECS. When it comes to futures and options based on them, the specs vary. Fortunately, the specs can be found on thinkorswim. Chart source: The thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results.
Even your plain vanilla equity options can occasionally be subject to changes in terms. They’re called options adjustments, and they’re typically the result of a “corporate action,” such as a stock split, special dividend, or an acquisition, for example. Adjustments can sometimes change the multiplier and/or the number of deliverable shares of an existing equity options contract.
Options adjustments aren’t bad or insidious—quite the opposite. They’re done to keep the math in line. But depending on the terms of an action, the multiplier may increase or decrease, and these so-called “non-standard options” may be deliverable into a quantity other than 100 shares. And the change will likely affect the debit or credit calculations.
Knowing your contract specifications—the multiplier, contract, 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 if you’re trading futures, options on futures, or non-standard equity options, your terms may be less straightforward. Either way, the lesson is clear: Before you dive into the options pool, check the water level.
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