Equity Option

Definition

The term equity option refers to a call or put involving an individual common stock or exchange traded fund (ETF).  Equity options are considered equity derivatives and are the most common type of this contract.

Explanation

Equity options are considered a derivative and provide the holder with the right, but not the obligation, to buy or sell stock in a prescribed timeframe and at a pre-determined price.  While a put provides the holder with the right to sell a security, a call provides the holder with the right to buy it.

The components of an equity option include:

  • Underlying Asset:  this is the common stock that is the underlying security in the option; typically quoted in terms of its option symbol (which is oftentimes also its stock symbol).
  • Quantity: one contract is equal to 100 shares of stock.  This is true for both calls and puts.
  • Strike Price:  this is the price at which the stock can be purchased via a call option or sold via a put option.
  • Expiration Date:  options expire on the third Saturday of the month, so the last trading day before an option expires is the third Friday of the expiration month.
  • Exercise Style:  generally, equity options are American options, which means they can be exercised on any trading day, up to and including the expiration date.

Example

The example below explains the construct of an equity option.  Specifically, an option contract will take the following form:

AAAA YYMMDDOPPPPPPPP
 
Where:

  • AAAA or AAA = the stock's trading symbol
  • YYMMDD = the option's expiration date, expressed in terms of year, month and day
  • O = an indication of the contract type, including a C (call) or P (put)
  • P = the strike price of the security

For example, the following option would be read as follows:

MSFT 170721C00070000

The option would be for Microsoft's common stock, with an expiration date of 7/21/2017, the option is a call (C), and the strike price is $70.00.

Related Terms

equivalent strategy, early exercise, diagonal spread, derivative