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Thursday November 20, 2008 |
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.
limited
risk 
understanding price
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