The Benefits of Options - Standardization

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The Benefits of Options - Standardization

One of the major benefits of options that many investors overlook is the fact that option contracts traded in the United States are standardized. In most cases one contract controls 100 shares of the underlying security and the strike price increments follow a logical progression. For stocks below $20 the strike price levels move in increments of $2.5, $5 for shares priced above $20 and below $200, and $10 for share prices above $200.

The driving force behind many of the efforts taken to make exchange traded options standard has been the various exchanges and the Option Clearing Corporation (OCC). The latter body has also been instrumental is making certain that every option contract that is exercised is matched with an option writer. The OCC guarantees that all exercised option contracts will be fulfilled, the buyer is no longer depended on the integrity of the option writer.

Because the OCC acts as a middleman between the option buyer and the option writer, the seller can eliminate his obligation to the original buyer by simply buying back the contract written in the open market. This transaction is settled with the OCC and obligation to deliver the underlying security if requested is removed.

With these factors in place, investors can commit to complex option strategies that require delivery of the underlying common stock at specified price points. This is extremely useful for the investor that may wish to hedge a short position.

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