Option Contract Terms

Options contracts are defined by their terms, which are standardized by the exchange on which the option is listed.

One of the broadest ways to categorize an option is by its class. You can get more specific by looking at a series. An options class refers to the entire group of calls or puts on a single underlying, while an options series describes only one set of contract terms within the class. For example, all call options on NRQ stock are in the same class, but only those that expire in April with a strike price of $35 are in the same series.

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Other important qualifications for options contracts include their size, expiration month, style, and how they're delivered.

A contract's size denotes how much of the underlying instrument will change hands if the option is exercised. For equity options, one contract generally controls 100 shares of the underlying instrument. So, if you purchase a NRQ 35 call with a $2 premium, you'll pay $200 for control of the 100 shares included in the contract. The strike price in this example is $35.

Option expirations are set up in monthly cycles with four available expiration months for each option. The period of time to expiration depends on the cycle in which the option falls. One exception is Long-Term Equity Anticipation Securities®, or LEAPS, which expire up to 30 months into the future, but trade in the same way that regular options do.

An option's style determines when you can exercise, assuming you're the option holder. Options can be American or European style, though both trade on U.S. exchanges. If the option is American style, you can exercise at any point up until the expiration date. European style options, on the other hand, can be exercised only on the date of expiration. All equity options are American style, though index options can be either style.

Regardless of their style, contracts generally expire on the Saturday after the third Friday of the month. Because brokerage firms establish various cut-off times for options transactions, it's important to understand the deadlines set by the firm you're working with. For example, you may have to notify your firm by a specific time in the week prior to the third Friday afternoon for the transaction to take place.

If an option is exercised, there are two forms of delivery: physical and cash-settled. Physical delivery means that the actual underlying instrument changes hands, as is the case with equity options. Cash-settled delivery means that cash is paid if the option is exercised. With cash-settled delivery, which occurs with an index option, for example, the money exchanged depends on the difference between the strike price and the value of the underlying instrument. This amount is determined by using a formula stipulated in the contract.

Examples exclude transaction costs and tax considerations.

Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in Scottrade's Options Application and Agreement, Brokerage Account Agreement, and Characteristics and Risks of Standardized Options (available at your local Scottrade branch office or from the Options Clearing Corporation at 1-888-OPTIONS or by visiting www.888options.com). All option accounts require prior approval by Scottrade. Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request.

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