More Options terms

Underlying security
Options traded on the ASX are only available over a limited
number of company shares, referred to as the underlying
securities. These underlying securities are determined by the
exchange based on their own set of guidelines. The companies
themselves do not have any control over the exchange traded
options that are issued in relation to their shares.
Generally, you will find exchanged traded options issued
over the larger companies listed on the exchange. As of April
2011, there were over 80 different companies on the ASX
with exchange traded options.

Contract size
On the ASX, all exchange traded option contracts have a
standard contract size of 100 as of May 2011. Prior to this
date, the standard contract size for all exchange traded
options contracts in Australia was 1000 shares. This brings
the ASX into alignment with the US exchanges, where the
standard contract size is 100 shares per option contract.

Expiry date
Every option has a limited life that is determined by the
option expiry date. The expiry date is the last day on which
the option can be traded (bought or sold) and is the date on
which all unexercised options expire. For options over shares,
the expiry date is usually the Thursday before the last Friday
in the month.

In this article, we are only discussing American style options.
American style options are options that can be exercised at any
time prior to the expiry date. Most options traded on the ASX
are American style options. There is, however, another style of
option called European style options. European style options
can only be exercised on the expiry date and not before.
As previously mentioned, the expiry date of stock
options is the Thursday before the last Friday of the month.
The expiry date is therefore quoted as a month, rather than a
specific date. Options will be quoted as having expiry dates
set on the financial quarters of March, June, September and
December, plus expiry dates in each month for the next three
to six months, depending upon the option category.

All exchange traded options on the ASX are categorised as
either category 1 stock options or category 2 stock options. Each
category of stock options has different expiry months on offer.
There are also longer term option contracts available.

Strike price
The strike price, also referred to as the exercise price, is the
price at which the underlying stock can be bought or sold
if the option is exercised. The ASX sets the strike prices for
all options listed on the ASX options market. There are a
range of strike prices set for each option expiry date for each
underlying security. New strike prices will be issued as the
market value of the underlying security changes. A typical
range of strike prices is shown in example 1.3.

Example 1.3
The underlying shares are trading at $14.70. It is likely that options
will be issued at strike prices of $11.50, $12.00, $12.50, $13.00,
$13.50, $14.00, $14.50, $15.00, $15.50, $16.00, $16.50, $17.00,
$17.50 and $18.00.
This provides a range of option prices to cater for the different price
expectations of option traders.

Premium
The option premium is the only component that is not
standardised by the exchange. The premium is the price at
which the option is bought and sold between a buyer and seller.