This chapter will introduce equity options and important information regarding them. To begin, let's set a base upon which to build by answering the lesson topic: What are options?
Option are derivatives. A derivative is a financial instrument (an agreement between two parties) that “derives” its value from an underlying asset. There are many reasons investors utilize option contracts. They include: 1) hedging current investments 2) speculating against future prices and 3) leveraging capital. The most common type of option contracts are equity options. These contracts derive their value from an underlying stock price. Our educational series focuses on these types of options. Buyers and sellers of option contracts include individual investors, institutional traders, market makers and more.
Originally introduced in 1973, equity options have exploded onto the investment scene with over 3.5 billion contracts traded in 2009 alone. There are many option exchanges where option contracts are traded. The biggest and best known is the Chicago Board of Options Exchange (CBOE) located in Chicago, Illinois.
Equity option contracts are regulated and cleared through the Options Clearing Corporation (OCC). The OCC guarantees liquidity and fair settlement among traders. Equity options are also regulated by the Securities and Exchange Commission (SEC).
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