Options contracts

An option contract defines the terms of an agreement between a buyer and a seller. The contract specifies the type of option (call or put), the number of shares, an expiration date, a strike price, and the premium.

The number of shares and any special conditions are explained as:

  • Standard options
  • Mini options
  • Adjusted options

The strike price of a security is the price at which:

  • A buyer has the option (the right) of buying the security
  • A seller is obligated to sell the security

The premium is the fee you pay to a seller when you buy an option contract. All option premiums are calculated per share. For example, 100 shares x premium per share = cost or profit of option contract.

Standard options

Standard option contracts include 100 shares of an underlying security. These contracts have an expiration date, a strike price, along with both buy and sell options of either European or American styles.

A European option means the option may only be exercised on the expiration date. An American option may be exercised on or before the expiration date.

Standard option contracts are often referred to as plain vanilla options.

Mini options

Mini option contracts include a deliverable of only 10 shares per contract whereas standard option contracts include 100 shares.

Currently, only the following securities can be used in mini option contracts:

  • SPY
  • AAPL
  • GOOG
  • AMZN
  • GLD

Adjusted options

Changes to an underlying asset (stock) can occur at any time and they are beyond your control. There may be a major change to one or more elements of the stock’s original capital structure, which affects the value of individual shares. For example, changes can include:

  • Cash dividends (not paid on a regular basis)
  • Stock dividends
  • Symbol or company name change
  • Stock splits (and reverse stock splits)
  • Mergers and acquisitions

When this occurs, the stock’s options may be adjusted.

Identifying adjusted options

There are several indicators that can help you identify an adjusted option. The following elements may change when an option contract is adjusted:

  • Strike price
  • Expiry date
  • Contract size/multiplier (normally the value is 100 for standard contracts and 10 for mini options)
  • Cash in lieu (a cash payment for fractional shares)