Stock option trading can be considered as one of the most financially
rewarding strategies one can become involved in. Sometimes, this becomes a
destructive investment plan, though. Stock option is the ‘right’ to purchase a
stock at a given price within a specified time. Stock option trading is largely
dependent on certain factors, such as name of the associated stock, strike
price, expiration date, and the premium paid for the option, plus the stock
broker’s commission.
Stock option trading involves trading standardized options contracts, which
are listed by a variety of futures and options exchanges. In the United States,
there are presently six exchanges where stock options are traded, including four
open-outcry marketplaces and two electronic marketplaces. The open-outcry
marketplaces are Philadelphia Stock Exchange (PHLX), American Stock Exchange
(AMEX) in New York City, the Pacific Exchange (PCX) in San Francisco, and the
Chicago Board Options Exchange (CBOE). The International Securities Exchange
(ISE) and Boston Options Exchange (BOX) are included in the electronic
marketplaces. In Europe, the main futures and options exchanges are
Euronext.liffe and Eurex.
Another option to trade a stock is the ‘over-the-counter’ (OTC) trading,
which is the opposite of exchange trading occurring in option exchanges or
futures exchanges. The OTCs are traded not in exchanges, but between two
independent groups; hence these transfers are the bi-lateral contracts. In this
contract, at least one group is typically a large financial organization with a
balance sheet big enough to guarantee such a contract. OTCs are administrated by
an International Swaps and Derivatives Association agreement.
Stock option trading, with no intent to ever exercise the option, may be
considered as a form of ‘leverage’. The 'grant' price (the price of an option)
on a security might increase over the price of the security itself. For this
reason, the entire value of trading in options has at times exceeded the total
value of trading in stocks themselves.
