An option class refers to all the call options or all the put options listed on an exchange for a particular underlying asset. Learn more about option classes, how they work, and their significance in the world of options trading.
Understanding option classes
An option class is a fundamental concept in the world of options trading. It refers to a category that includes all the call options or all the put options listed on an exchange for a particular underlying asset. This article delves into the details of option classes, how they function, and why they are crucial for investors and traders.
Explaining option classes
Imagine you’re interested in trading options on a popular stock like Apple Inc. (AAPL). All the call options available for trade on AAPL’s stock are part of the same options class, and similarly, all the put options on AAPL belong to another related class. These option classes are like containers that group similar options together for the convenience of traders and investors.
The size and trading volume of the underlying asset, as well as overall market conditions, determine the number of options available for purchase or sale within a specific option class.
Option classes and option series
Option classes are primarily used to categorize options listed on an exchange for investors’ ease. Major public market exchanges utilize option classes to organize the options available for trade on a given underlying asset. These option classes are often divided into smaller units known as option series.
An option series comprises all the calls or puts with various strike prices and the same expiry date for a given underlying asset. For example, if you’re looking at options that expire in June, that would constitute an option series. It’s important to note that an option series is a part of the larger option class.
Options across the market
While option classes are a common feature on public market exchanges, other markets, such as over-the-counter (OTC) or institutional markets, may not always use option classes due to the complexity and customized structuring of the options being traded. The nature of options in these markets may differ significantly from exchange-traded options.
Similar to stocks, exchange-traded options must be transacted through a broker who connects with market makers to facilitate trading. Option exchanges use standard bid-ask pricing models. Although option prices are calculated using advanced analytics, their daily trading prices are still influenced by supply and demand in the market.
It’s worth noting that broker-dealers typically require a minimum capital investment, typically around $2,000, for approval of an options trading account. Rules and regulations for options trading are overseen by the Options Clearing Corporation (OCC).
Once an investor gains access to an options trading platform, they will be able to view the full listing of option classes for their preferred underlying security. Options are usually listed and classified by the ticker symbol of the instrument’s underlying asset.
Options brokerage trading platforms usually segregate calls and puts on underlying securities. Calls and puts are the two broadest option classes available. Within each of these classes, investors will find a list of available strike prices and expirations.
The amount of information provided on each option class may vary based on an investor’s subscription preferences. Some options quotes include advanced analytics such as
Greeks, while others may only show basic contract details like strike prices, expiry dates, bid and ask prices, and more.
Pros and cons of option classes
Here is a list of the benefits and drawbacks of option classes in options trading.
- Option classes help organize and categorize options for traders and investors.
- Understanding option classes is essential for efficient options trading.
- Option series within classes provide further granularity for traders to choose from.
- Complexity in options trading can be a drawback, especially for beginners.
- The customization in OTC and institutional markets may not align with traditional option classes.
Real-world examples of option classes
Let’s explore some real-world examples to illustrate the concept of option classes:
1. SPDR S&P 500 Trust (SPY)
The option class for the SPDR S&P 500 Trust (SPY) is a prime example of a large and actively traded option class. SPY is an exchange-traded fund (ETF) that tracks the performance of the S&P 500 index. As one of the most popular ETFs, it offers a wide range of call and put options. Traders can choose from various strike prices and expiry dates, making it a robust and versatile option class.
2. Apple Inc. (AAPL)
We previously mentioned Apple Inc. (AAPL) as an example. It’s worth noting that AAPL’s option class is also significant, given the company’s widespread popularity and trading volume. Traders and investors can find a multitude of options linked to AAPL’s stock, with options available for different strike prices and expiry dates.
3. Barnes Group Inc. (B)
On the other hand, let’s consider the option class for Barnes Group Inc. (B). This company may have a relatively small option class. In our previous example, as of June 2019, there were several options available for trade with just two available expiry dates. The size of an option class can fluctuate based on the demand and supply of options in the market. Smaller companies or those with less trading activity may have more limited option classes.
4. Amazon.com Inc. (AMZN)
Amazon.com Inc. (AMZN) is another well-known example. With its high stock price and considerable market demand, AMZN’s option class is typically extensive. Traders can find a broad selection of call and put options with various strike prices and expirations. AMZN’s option class is an excellent illustration of how popular stocks often have robust and diverse options markets.
5. Tesla, Inc. (TSLA)
Tesla, Inc. (TSLA) is a company that has attracted substantial attention in the stock market. Consequently, its option class is usually quite active. Traders interested in TSLA can explore various call and put options with differing strike prices and expiry dates. This demonstrates how volatile and widely discussed stocks can lead to robust option classes.
These additional real-world examples offer a more comprehensive understanding of option classes, showcasing how the size and activity of an option class can vary depending on the popularity and trading volume of the underlying asset.
Option classes play a vital role in the world of options trading. They serve as a framework for categorizing and organizing options, making it easier for traders and investors to navigate the complex options market. Understanding the relationship between option classes and option series is essential for anyone looking to engage in options trading. Whether you’re trading on a major exchange or exploring customized options in other markets, having a solid grasp of option classes is fundamental to making informed investment decisions.
Frequently asked questions about option class
What are the key characteristics of option classes?
Option classes categorize all the call options or put options for a specific underlying asset. They can further be divided into option series, which include options expiring in the same month.
How can I access information about option classes for a particular asset?
Once you have access to an options trading platform, you can usually find option classes categorized by the ticker symbol of the underlying asset. The available information may vary based on your subscription preferences.
What are the differences between option classes and option chains?
Option classes group similar options (either calls or puts) for the same underlying asset. Option chains, on the other hand, include both call and put options for a specific security, providing a comprehensive view of all available options.
Do all markets use option classes?
No, while public market exchanges commonly use option classes, markets like over-the-counter (OTC) and institutional markets may not use them due to the complexity of their options.
What role do broker-dealers play in options trading?
Broker-dealers facilitate the trading of options by connecting traders with market makers and ensuring a smooth and secure buying and selling process. They play a crucial role in the options trading ecosystem.
If you’re new to options trading, it’s essential to understand the following key takeaways:
- An option class includes all the same type of options (either calls or puts) for a particular underlying security.
- Option classes can be further divided into subsets known as option series, which encompass all the calls or puts for an underlying asset that expire in the same month.
- Understanding the size and composition of an option class can vary based on the popularity and trading volume of the underlying asset.
- Option classes serve as a vital tool for categorizing and organizing options, simplifying the options market for traders and investors.
View article sources
- A short introduction to exchange traded options – FAO
- Options: Calls and Puts – Overview, Examples, Trading … – Corporate finance institute
- Options – FINRA
- Option (finance) – Wikipedia
- Option Class – Definition & Meaning – Fisdom