Options Trading A-Z

Edward J Modla Michael McCrary

Executive Director, Investor Education Regional Brokerage Consultant
OCC Fidelity Investments

www.OptionsEducation.org
Disclaimer
Options involve risks and are not suitable for everyone. Individuals should not enter into options transactions until they have read and
understood the options disclosure document, Characteristics and Risks of Standardized Options, available by visiting OptionsEducation.org or
by contacting your broker, any exchange on which options are traded, or The Options Clearing Corporation at 125 S. Franklin St., #1200,
Chicago, IL 60606.

In order to simplify the calculations used in the examples in these materials, commissions, fees, margin, interest and taxes have not been
included. These costs will impact the outcome of any stock and options transactions and must be considered prior to entering into any
transactions. Investors should consult their tax advisor about any potential tax consequences.

Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes and
should not be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee
of future results.

All content in this document is owned, or licensed, by The Options Clearing Corporation (‘OCC’). Unauthorized use is prohibited without
written permission of OCC. While reasonable efforts have been made to ensure that the contents of this document are accurate, the
document is provided strictly “as is”, and no warranties of accuracy are given concerning the contents of the information contained in this
document, including any warranty that the document will be kept up to date. OCC reserves the right to change details in this document
without notice. To the extent permitted by law no liability (including liability to any person by reason of negligence) will be accepted by OCC or
its employees for any direct or indirect loss or damage caused by omissions from or inaccuracies in this document.

© 2022 The Options Clearing Corporation. All rights reserved.

Trademarks
The following trademarks, logos, and service marks displayed are owned by The Options Clearing Corporation:

The Options Clearing Corporation® OCC®

The Options Industry Council (OIC)SM

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Presentation Outline
• Options Listings
• Basics
• Options Pricing
• Supply and Demand
• Moneyness
• Variables
• Exercise and Assignment
• Option Holders
• Option Sellers

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Options Listings and Basics
Options Exchanges Decide
• Pursuant to option exchange rules, securities
meeting the following criteria are candidates to have
listed options:
• Shares trading on a national stock exchange
• Minimum price of $3 per share for three
consecutive trading days prior to listing
• At least 7 million publicly held shares outstanding
• At least 2,000 shareholders
• Criteria typically applies to equity and ETF
listings
 Generally, a minimum of three trading days from the
IPO date
© 2022 The Options Clearing Corporation. All Rights Reserved. 6
Defining an Option
• Options are contracts that give:
• The buyer the right to buy or sell an underlying asset
• The seller the obligation to buy or sell an underlying asset

• At a specified price (strike price),

• Prior to the expiration of the
contract (expiration date)

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Buyers and Sellers (Rights and Obligations)
Option contracts give…

Calls Puts • Typically 100 shares

Buyer/Holder Right Right of the underlying
(Long) to buy to sell • at the strike price
Seller/Writer Obligation Obligation • any time before
(Short) to sell to buy expiration

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Options Pricing
Options Pricing
Who makes options prices?
• All market participants (buyers & sellers)
• Individual & Institutional investors
• Professional market-makers
• Best bid/ask is consensus of all bids and offers
What is an option ultimately worth?
• What the market is willing to pay
• Pricing models used as guideline
• Supply/demand & market dynamics can override
theoretical values

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Calls: In-the-Money, At-the-Money, Out-of-
the-Money
Jan 40.00 call

• Call is in-the-money (ITM) Feb 40.00 call

Apr 40.00 call
ITM
• Strike price below stock price Jan 45.00 call
Feb 45.00 call

• Call is at-the-money (ATM) Apr 45.00 call

Jan 50.00 call
ATM
• Strike price same as stock price Feb 50.00 call
Apr 50.00 call

• Call is out-of-the-money (OTM) Jan 55.00 call

Feb 55.00 call
• Strike price above stock price Stock
Apr 55.00 call
Jan 60.00 call
OTM
Price Feb 60.00 call
$50.00
Apr 60.00 call

© 2022 The Options Clearing Corporation. All Rights Reserved. 11

Puts: In-the-Money, At-the-Money, Out-of-
the-Money
Jan 40.00 put
Feb 40.00 put
• Put is in-the-money (ITM) Apr 40.00 put
OTM
Jan 45.00 put
• Strike price above stock price Feb 45.00 put
Apr 45.00 put
• Put is at-the-money (ATM) Jan 50.00 put
Feb 50.00 put ATM
• Strike price same as stock price Apr 50.00 put
Jan 55.00 put
• Put is out-of-the-money (OTM) Feb 55.00 put
Apr 55.00 put
• Strike price below stock price Stock Jan 60.00 put
ITM
Price Feb 60.00 put
$50.00
Apr 60.00 put

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Options Pricing Models
Mathematical formulas that can be a useful tool in establishing a trading plan
• Pricing Model Inputs
• Stock price
• Strike price
• Implied Volatility (IV)
• Time until expiration
• Cost of money (interest rates less dividends)
• Output
• Call and put premiums (theoretical values)

In addition to pricing factors there is

unpredictable supply and demand
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Exercise and Assignment
Exercise: Buy or Sell Underlying Stock
• The option buyer has the right:
• to buy (for a call) or sell (for a put)
• Typically 100 shares of underlying stock/ETF
• at the strike price per share
• if he/she exercises a long contract
• To exercise, the buyer issues an exercise notice
to his/her brokerage firm (or Auto-ex)
• Only option buyers may exercise an options contract

© 2022 The Options Clearing Corporation. All Rights Reserved. 15

Assignment: Buy or Sell Underlying Stock

• The option seller has the obligation:

• to sell (for a call) or buy (for a put)
• Typically 100 shares of underlying stock/ETF
• at the strike price per share
• if he/she is assigned an exercise notice
• Assignment notice is received from seller’s brokerage firm
• Only option sellers may be assigned on an options contract

© 2022 The Options Clearing Corporation. All Rights Reserved. 16

The information provided in this communication is solely for educational purposes and should not be construed as advice or an
investment recommendation. Fidelity Investments is a separate company, unaffiliated with the Options Clearing Corporation.
There is no form of partnership, agency affiliation, or similar relationship between the Options Clearing Corporation and Fidelity
Investments, nor is such a relationship created or implied by the information herein. Fidelity Investments has not been involved
with the preparation of the content supplied by the Options Clearing Corporation and does not guarantee or assume any
responsibility for its accuracy or completeness.