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Options Investing 101 – Part 2



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Nov 06 2006
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What is the contract size of an equity option?
The contract size of an option refers to the amount of the underlying asset covered by the options contract. One option is equal to 100 shares unless adjusted for a special event, such as a stock split or a stock dividend.

What is open interest?
Open interest refers to the number of outstanding option contracts in the exchange market or in a particular class or series.
What is a market-maker?
Market-makers provide liquidity in option trading by risking their own capital for personal trading, and are the backbone of the CBOE’s trading system. They take the opposite side of public orders by competing in an open outcry auction market. Floor brokers, on the other hand, act only as agents, executing orders for public or firm accounts. In fact I would say small player like us is trading against these market makers.
Does a “specialist” buy and sell options?
Most option classes listed at the CBOE are traded in an open outcry system where certain members of the Exchange may trade as market-makers. Market-makers provide liquidity in option trading by risking their own capital for personal trading, and are the backbone of the CBOE’s trading system. They take the opposite side of public orders by competing in an open outcry auction market. This differs from the trading environment on many other exchanges where “specialists” are allowed to accept orders from the public, to manage the public order book and to deal for their own accounts in the same securities.

What is fair value?
The term “fair value” (also “theoretical value”) means that, statistically, the stated option price favors neither the buyer nor the seller. Option pricing formulas require six inputs, underlying price, strike price, time to expiration, interest rates, dividends and volatility. Option prices do not predict the direction of the price of the underlying instrument. An analogy can be made between options and insurance. If you pay a “fair price” for homeowner’s insurance, there is no prediction in the price of the policy as to whether or not your house will burn down.
What are regular trading hours?
Regular trading hours are :
Equities: 8:30 a.m. to 3:00 p.m. Central Time
Indexes: Trading hours vary depending upon the index product.

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