Corporation. Then, in August 2000, Ford offered shareholders a choice of
converting their shares into (a) new shares of Ford plus $20 cash per share,
(b) new Ford stock plus fractional shares with an aggregate value of $20, or
(c) new Ford stock plus a combination of more new Ford stock and cash.
There were three classes of options listed on Ford after both of these
changes: F represented 100 shares of the new Ford stock; XFO represented
100 shares of Ford plus $20 per share ($2,000) plus cash in lieu of $1.24;
and FOD represented 100 shares of new Ford, 13 shares of Visteon, and
$2,001.24.
Sometimes these changes can get complicated. If there is ever a question
as to what the underlying is for an option class, the authority is the OCC. A
lot of time, money, and stress can be saved by calling the OCC at 888-
OPTIONS and clarifying the matter.
Expiration Month
Options expire on the Saturday following the third Friday of the stated
month, which in this case is December. The final trading day for an option
is commonly the day before expiration—here, the third Friday of
December. There are usually at least four months listed for trading on an
option class. There may be a total of six months if Long-Term Equity
AnticiPation Securities® or LEAPS® are listed on the class. LEAPS can have
one year to about two-and-a-half years until expiration. Some underlyings
have one-week options called WeeklysSM listed on them.
Strike Price
The price at which the option holder owns the right to buy or to sell the
underlying is called the strike price, or exercise price. In this example, the
holder owns the right to buy the stock at $170 per share. There is method to
the madness regarding how strike prices are listed. Strike prices are
generally listed in $1, $2.50, $5, or $10 increments, depending on the value
of the strikes and the liquidity of the options.
The relationship of the strike price to the stock price is important in
pricing options. For calls, if the stock price is above the strike price, the call
is in-the-money (ITM). If the stock and the strike prices are close, the call is