Option contract specifications - Options Investing E-learning

Discover the most important elements of an options contract: the option price, the strike price, the underlying asset, the contract size, and the expiry date (the point in time at which you can make use of your right to buy or sell the underlying asset). These are detailed in the option contract specifications. Once you learn these initial basics, you can move on to more detailed topics such as position management and valuation.

Standardisation

The options that are traded on the Euronext derivatives market meet certain standard conditions. The contract size, lifetime, expiration date and exercise price (or strike price) are standardised. The option premium is the only variable element. Option premiums are quoted as the amount payable for each unit of the underlying value.

The strike price or exercise price of an option

The exercise price, also known as “strike” or “strike price”, is the price at which the holder (i.e. buyer) of the option can buy or sell the underlying value when the option is exercised. The exercise price is stated as an amount payable for each unit of the underlying value. When Euronext announces the introduction of options with a new expiration month, it sets a number of different exercise prices which are close to the market price of the underlying value at that time. Euronext sets the interval between the exercise prices for each option class individually. In normal circumstances, once an option series has been listed by Euronext it will continue to be traded until the expiration date.

Maturity, an option's lifetime

The lifetime of an option is the maximum period during which the option represents a right. At the end of this period the right no longer exists and the option has no value. The lifetime of options traded on Euronext’s derivatives market varies from one month to five years.

The last day of trading in an option is the last day on which it is possible to trade in an expiring option series. Weekly options and even Daily options exist on the Euronext derivative markets. However, for most classes the last day of trading is the third Friday of the expiration month. If the markets are closed on the third Friday of the month, the last day of trading in the option series is the last day of trading before the third Friday. After trading has stopped in an expiring series, the right to buy or sell the underlying value can still be exercised until the cut-off time. Your broker may observe different cut-off times. Each broker is free to set a different, earlier cut-off time for submitting exercise instructions or orders for transactions in expiring series. The broker will pass on to the options clearing the exercise instructions received from its clients.

A right to buy or sell what? The Underlying asset

The financial instruments on which options are traded – the underlying values – are selected by Euronext. When selecting new option classes, Euronext gives preference to underlying values that are widely held and actively traded, particularly on official exchanges. Other criteria are also taken into account, such as availability of the underlying value, trading volumes and price volatility. Euronext notifies issuers of shares on which options will be introduced of the fact that they have been selected for this. In exceptional circumstances, Euronext may decide to remove an option class from listing.

Quantity of the underlying asset

Option premiums are quoted as the amount payable for each unit of the underlying value. The contract size is the quantity of the underlying value that corresponds to one option contract. The contract size is based on the trading unit and the pricing unit (is often 1). 

Delivering the product or cash?

After being exercised, options can be settled in two ways: by means of either physical delivery or cash settlement. In most cases, exercising an option results in the physical delivery of the underlying value. However, a number of Euronext options are settled in cash on the basis of the difference between the exercise price and the settlement price. The form of settlement used for each option class and, where applicable, the method used to calculate the settlement price is detailed in the contract specifications. Contract specifications for each option class are available on the Euronext website.

American or European style

There are two types of options: American style and European style. An American-style option can be exercised at any time during the option’s lifetime. A European-style option can only be exercised on the expiration date, although open positions in these options can be closed before expiration.

Currency of the option and underlying value

When Euronext selects a new option class, its first task is to establish which market is the main market for trading in the relevant underlying value. This is generally, though not necessarily, the home market, i.e. the market in the underlying value’s country of origin. The currency of the country of origin is usually the currency that is used at Euronext for quoting premiums for options on a particular underlying value.

Conclusion