36 lines
2.7 KiB
Plaintext
36 lines
2.7 KiB
Plaintext
6 Part I: Basic Properties of Stock Options
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consists of all contracts of the same class (IBM, for example) having the same expi
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ration date and striking price.
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Opening and Closing Transactions. An opening transaction is the ini
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tial transaction, either a buy or a sell. For example, an opening buy transaction
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creates or increases a long position in the customer's account. A closing trans
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action reduces the customer's position. Opening buys are often followed by clos
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ing sales; correspondingly, opening sells often precede closing buy trades.
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Open Interest. The option exchanges keep track of the number of opening
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and closing transactions in each option series. This is called the open interest.
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Each opening transaction adds to the open interest and each closing transaction
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decreases the open interest. The open interest is expressed in number of option
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contracts, so that one order to buy 5 calls opening would increase the open
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interest by 5. Note that the open interest does not differentiate between buyers
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and sellers - there is no way to tell if there is a preponderance of either one.
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While the magnitude of the open interest is not an extremely important piece of
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data for the investor, it is useful in determining the liquidity of the option in
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question. If there is a large open interest, then there should be little problem in
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making fairly large trades. However, if the open interest is small - only a few
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hundred contracts outstanding - then there might not be a reasonable second
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ary market in that option series.
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The Holder and Writer. Anyone who buys an option as the initial transac
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tion - that is, buys opening - is called the holder. On the other hand, the
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investor who sells an option as the initial transaction - an opening sale - is called
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the writer of the option. Commonly, the writer ( or seller) of an option is referred
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to as being short the option contract. The term "writer" dates back to the over
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the-counter days, when a direct link existed between buyers and sellers of
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options; at that time, the seller was the writer of a new contract to buy stock. In
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the listed option market, however, the issuer of all options is the Options
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Clearing Corporation, and contracts are standardized. This important difference
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makes it possible to break the direct link between the buyer and seller, paving
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the way for the formation of the secondary markets that now exist.
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Exercise and Assignment. An option owner ( or holder) who invokes the
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right to buy or sell is said to exercise the option. Call option holders exercise to
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buy stock; put holders exercise to sell. The holder of most stock options may
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exercise the option at any time after taking possession of it, up until 8:00 P.M. on |