Dr. Scott Brown
Stock Options
Options Symbol
 An option symbol is a code by which options are identified
on a futures exchange.

Ex. XDLQ2
 Although the letters may appear random, there is actually
an organized structure to each symbol.
 It is a backup to ensure you enter the correct option order.
 This is one of the three most common mistakes for both
retailers and brokers.

Incorrect symbol, Wrong quantity, Wrong Action
Incorrect Symbols Are Costly
 You have to pay an extra commission to correct it
(remove and replace)
 You can incur a Loss
 You may miss out favorable movements
Symbol Structure
XXXMS
XXX – the root symbol
M – Month
S – Strike Price
The Root symbol
• Is a code that identifies the underlying code
and can be any length form one to three
letters.
 Stocks listed on an exchange will have the same root
symbol as the ticker symbol, although it may be different
from splits, mergers, acquisitions and special dividends.
 Ex. IBM, GE
 For the NASDAQ trade stocks (with 4 letters ticker) will be
reduced to three letters, including an ending “Q” to
designate NASDAQ.
 Ex.
Dell – DLQ
MSFT – MSQ
The Month Symbol
 The month symbol depends on the type of the option, a call
or put.
 For call options: the first twelve letters of the alphabet
represent the 12 months
 For puts: Letters M to X (letters 14 to 23 of the alphabet) are
use to represents the months.
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug Sept Oct
Call
s
A
B
C
D
E
F
G
H
I
Puts
M
N
O
P
Q
R
S
T
U
Nov
Dec
J
K
L
V
W
X
Options Strike Price Symbol
 Each letter from A to T represents $5 strike intervals.
 Because there is a wide range of potential strike prices
and a limited number of letters, each letter represents
more than one strike price.
 Once $100 is reached (letter T) a new root symbol is
created and we are required to start back at A.
 In addition letters U trough Z are reserved for $2.50
strike intervals.
Options Strike Price Symbol
Other Considerations …
 If any option you are holding goes through a
symbol change, it will automatically change in
your account.
 You must always check the symbol before trading,
nothing ensures that the root will remains the
same.
There
are
companies
that
use
different roots based on the range in which is
the strike price
 The MS of the symbol tells three important things:
 The month, the strike price and the option type
Option Expiration Cycles
 Because option strategies require making
modifications during the life of a trade, you need to
know in what months the options will expire.
 Originally all options stocks were randomly assigned
to one of three cycles:
 1st Cycle: January; 2nd Cycle: February and 3rd Cycle
March
 Once a stock is assigned to a particular cycle, it does not
change.
The Cycles
 Options under Cycle 1 would have expirations
matching the first month of each quarter.
 The Cycle 2 Stocks only have options expiration to the
middle month of each quarter.
 And the Cycle 3 have expiration for the end month of
each quarter.
Jan
Feb
Mar Apr May
Jun
Jul
Aug
Sep
t
Oct Nov Dec
New Rules
 To ensure that there would always be short-term
options, the CEOB decide to change the rules.
 Under the new rules, there would still be four option
expiration months listed:
The first two months of the quarter are
always the two near months (the current and
the following month, also called the serial
months), but for the two farther-out months,
the rules use the original
cycles.
Let’s see how it works …
Let's say it is the beginning of January, and we are
looking at a stock assigned to the January cycle. Under
the newer rules, there is always the current month plus
the following month available, so January and
February will be available. Because four months must
trade, the next two months from the original cycle
would be April and July. So, the stock will have options
available in January, February, April and July.
Jan
Feb
Mar Apr May
Jun
Jul
Aug
Sep
t
Oct Nov Dec
Let’s see how it works … (Cont.)
What happens when January expires?
February is already trading, so that simply
becomes the near-month contract. Because the first
two months must trade options, March will begin to
trade on the first trading day after the January
expiration date. So the four months now available are
February,
March,
April
and
July.
Jan
Feb
Mar Apr May
Jun
Jul
Aug
Sep
t
Oct Nov Dec
Let’s see how it works … (Cont.)
What happens when February expires?
Once the February options expire, March
becomes the current contract. The following
month, April, is already trading. But with March,
April and July contracts trading, that's only three
expiration months, and we need four. So, we go
back to the original cycle and add October because
it is the next month in the January cycle after July.
So the March, April, July and October options will
now be available.
Jan
Feb
Mar Apr May
Jun
Jul
Aug
Sep
t
Oct Nov Dec
Some Highlights …
 This pattern continues regardless of which cycle we’re
on.
 The serial months (current and following) must always
be made available. No matter the cycle of stock, it will
have the serial months available.
 The remaining two months will be from the
corresponding quarterly cycle.
LEAPS
 LEAPS are long-term options
 When options first started trading, there were available up to nine
months, but with LEAPS we can find options nearly three years forward.
 There will be more than four contracts listed at any given time.
 LEAPS usually trade with a January expiration date. If a stock does have
LEAPS, then new LEAPS are issued in May, June or July depending on
the cycle to which the stock is assigned.
 The premiums for LEAPs are higher than for standard options in the
same stock because the increased expiration date gives the underlying
asset more time to make a substantial move and for the investor to make
a healthy profit.
How do Options Cycle works with the
addition of LEAPS?
 If a stock trades LEAPS, the new LEAPS will be issued
sometime between May and July.
 Let’s explain it with an example…
 It’s currently July ‘05 and Intel has the following months
trading: July, August, October, January‘06, January‘07, and
January’08

At this point Jan’07 and Jan’08 are LEAPS contracts. The Jan’06 are
considered a quarterly contract.
 When July expires, September will be added
 We will then have August, September, October, and January’06
providing four months of regular contracts.
 When August expires, , we will have only three months
providing regular contracts, therefore the next January Cycle
month will be added, which is April.
How do Options Cycle works with the
addition of LEAPS? (Cont.)
 This process continues and eventually the date become
May’06. The January’06 options will have been expired, and
are no longer listed.



When May options expire, there will be only three contracts months
(June, July, and October).
This is where we have to add another January contract since it is the
next January cycle month. It is at this point where the January’09
contract will be rolled out.
At the same time the January’07 contract will lose their LEAPS
designation because they have les than nine months to expiration.
 The root symbol to show that it is no longer a LEAPS option, this
will happens in May, June or July.
 This process is called melding (when LEAPS options become
regular options).
Which Cycle is My Stock On?
 Before you can find out when a particular month will
be added to the list you will need to:
 Know in which cycle your stock is trade

How? If we have the months that the option has being traded,
we know that the first two months are the serial months, so
we must look at the third or fourth month (when the 3rd
month is January, because all stocks that have LEAPS options
will have them listed in January).
Then we have to see to which cycle the months belong.
Double, Triple and Quadruple
Witching
 These are days when multiple derivative products
expire on the same day.
 If a stock futures, stock index options, and stock
options, all expire the same day, that’s a Triple
Witching day.

Typically stocks futures expire on the last month of each
quarter (Mar, Jun, Sept, Dec) , so triple witching occur only on
these months.
 Double Witching occur when any two of the three
assets expire the same day.
 Quadruple Witching occurs when single-stock future
expire on the same day as well.
Contract Size (The Multiplier)
 Contract Size:
 First start trading options is “generally” 100-share lots.


Referred as “The Multiplier” since is the amount we need to
multiply the option premium by to find the total cost of the
contract.
 Ex.: if a call option is asking $3, you pay $3*100= $300 (plus
Commisions).
Its also the amount we must multiply to find the total cost of
the contract:
 Ex: if you exercise a $30 call, you pay $30*100= $3,000 & receive
100 shares of stock.
Contract Size (The Multiplier)
 Changes in Contract Size:
 Most common event are stock splits.



They generally occur when the price of a stock is perceived to
be too high, and the company splits the stock to bring the
price down.
It’s considered a dividend paid in shares rather than cash.
Three types of stock splits
 Whole Number Split
 Fractional Split
 Reverse Split
Contract Size (The Multiplier)
 Whole Number Split:
 You always end up with multiple 100-share lots after the
split. The most popular is 2:1.

Ex.: ABC stock is trading for $180 per share. The company
thinks is too expensive and announces 2:1 Stock split. If you
own 100 shares of ABC prior to the split:
 You will own 200 shares (100 shares * {2/1} = 200 shares).
 Price of the stock will fall to $90 ($180 per shares/2 = $90 per
share).
 You will be in the same position, $18,000 worth of ABC stock.
Contract Size (The Multiplier)
 Fractional Split:
 Any stock split were the second number is greater than 1
creates a fractional split, such as 3:2.

Ex.: Recall the last example and now assume the stock split is
3:2. The split ratio is 3/2= 1.5. If you had 100 shares prior to the
split:
 You’d have 150 shares (100 shares * {3/2 = 1.5} = 150 shares).
 The price of the stock would fall too $120 ($180 per share/ {3/2
= 1.5} = $120 per share).
 You will still be in the same position, $18,000 worth of stock.
Contract Size (The Multiplier)
 Reverse Split:
 In this case, a company with a very low stock price may vote
for a reverse split to lift the price of the stock in hopes of
being recognized as a viable investment.
 In certain cases, this is done to meet listing requirements so
that the stock be traded on a nationally recognized exchange.

Ex.: Recall the last example and now assume the split is 1:3. The split
ratio is 1/3 = .33. If you had 100 shares prior to the split:
 You’d have 33 shares (100 shares * 0.33 = 33 shares).
 The price would rise too $545.45 ($180 per share/0.33 = $545.45)
 You’d still be in the same position, $18,000 worth of ABC stock.
Contract Size (The Multiplier)
 Effect on you're option contracts:
 Ex.: Assume you own 20 XYZ $10 calls trading for $1 and
the company announces 1:5 reverse split. The split ratio
is 1/5 = .20.



The number of contracts you own is 4 (20 contracts*0.2 = 4
contracts).
Strike price increased too $50 ($10 per share/0.20 = $50 per
share).
Price of the option rises to $5 ($1/0.2 = $5).
Contract Size (The Multiplier)
 Effect on you’re option contracts (cont.):
 Original position:


Contract price is $2,000 = $1*20 contracts*100 shares per contract.
Exercise value is $20,000 = $10*20contracts*100 shares per contract.
 After Split Position:
 Contract Price is $2,000 = $5*4 contracts*100 shares per contract.
 Exercise value is $20,000 = $50*4 contracts*100 shares per contract.
 There’s no change in position, only the distribution of the
investment.
Contract Adjustments for Special
Dividends
 Many stocks pay dividends on a quarterly basis.
 Ex.: If a stock pays $0.80 dividend and you own 100 shares,
you’ll receive $8 per year in you’re brokerage account.
 Stock price is always reduced by the amount of the
dividend on the date the dividend is paid, which is known
as the ex-date.
 Regular paid dividends do not affect options.
 Special paid dividends reduce all call and put strikes by the
same amount.

Ex.: If Microsoft announces a $3 dividend and you own a $30 call or
put, the strike price will be reduced to $27.
Contract Adjustments for Special
Dividends
 The Intrinsic value of the stock doesn't change.
 Ex.: Recall the last example and assume that the stock
trades for $35.

Intrinsic value of the option is $5 ($35-$30).
 After $3 dividend is paid:



Stock price is $32 ($35-$3).
Strike price is $27 ($30-$3).
Intrinsic value still remains $5 ($32-$27).
Open Interest
 Options Clearing Corporation (OCC) must account for
the total number of outstanding contracts.
 The reason is because an option is created between two
traders on opposite ends of an agreement.
 OCC need to know if a trader is entering a contract or
exiting.

Enter or increase position (buy to open/sell to open) Vs.
Exiting or reducing position (sell to close/buy to close).
Open Interest
 Open interest keeps track of how many open
contracts there are for a specific option.
 You must count either all long positions or all short
positions to get the number of outstanding
contracts.
 Whenever both traders are entering “opening”
transactions, then the open interest will increase.
 Whenever both traders are exiting “closing”
transactions, then the open interest will decrease.
 If one trader is entering and the other closing, then
open interest remains unchanged.
Open Interest
 Open interest is used as a liquidity guide.
 Ex.: NDX is trading around 1,550 contracts for the $1550
call trading for $108. The open interest is 1,578.

1,578*$108 per share*100 shares = $17,000,000 represented in
this option.
Call Options
 Early Exercise:
 American Style option can be exercised at any time prior
to expiration.
 For many traders, the exercise restrictions on European
options are considered as negative features.
 It is never advantageous to exercise a call option early,
with the exception of the investors that want to collect
upcoming dividends on stock.
Call Options
 Early Exercise on a Non- Dividend Paying Stock:
 Ex.: Investor#1 buys a stock for $50, and
Invetor#2 buys a $50 call for $2. If the stock is
trading for $60 at expiration:




Invetor#1 gains $10 ($60-$50)
Investor#2 gains $8 ($60-$52)
If the stock rises price, both profit dollar for dollar
from the stock.
If the stock price drops, the option holder only loses
$2 while the stock holder loses dollar for dollar for the
drop.
Call Options
 Exercising a Call to Collect a Dividend:
 Designed to offset a loss and not for a financial gain.

Ex.: Assume that a stock is trading for $50 and pays $1
dividend. You own a $40 call that is trading at parity for $10.
The day the dividend is paid, the stock value decreases by $1.
If you exercise the call:
 $10 of unrealized gain, while lose $1 of stock price.
 You get dividend of $1.
 Therefore you now have $9 of unrealized gain and $1 of
realized gain.
Put Options
 With put options, if the stock is sufficiently in the
money, it doesn’t make sense to exercise early.
 The difference with the call option, with a put option
you're trying to get rid of a risky asset and receiving
cash.
 If you delay the exercise of the put, you only lose the
interest you could have earned on the cash.
Mechanics of Exercising a Call to
Collect Dividends
 If an investor wishes to collect the dividend on a stock,
he must exercise the call to gain control of it.
 He must be a stockholder before the record date to be
eligible to receive the dividend.
 Investor must focus to exercise the call option before
the ex-date to assure to buy the stock with the
dividend. If an investor buy on or after the ex-date, he
buys the stock without the dividend.
Why Is There So Much Confusion In
Practice?
 For investors, to figure out who gets the dividend is not as easy
as it seems. Many times they get confused and are unable to
find the appropriate date the stock must be buy in order to
receive the dividend payment. The reason for this confusion is
due to three dates associated with the dividend
announcement:
 Record date
 Payable date
 Ex-date
Why Is There So Much Confusion In
Practice? (cont)
 Corporations usually only publicize the record date and
payable date.
 The record date is the only date that matters to the company.
Before making the dividend payment, the company looks at a
list of names of the stock owners as of the record date and pay
the dividends to them.
 The payable date is when the payment is actually made, which
may be a week or more after the record date.
Why Is There So Much Confusion In
Practice? (cont)
 In order to be the owner of record, the stock transaction must
be settled by the record date. There is currently a threebusiness-day settlement period (trade date plus three business
day). For example, if you buy a stock on Monday it will be
settle on Thursday.
 Suppose that the record date is on March 10, if you want to
own the stock by that date, you need to make your purchase
on March 7 or before. If you buy the stock on March 8 or later
you will not be the owner as of the record date (you will not
receive the dividend payment).
Why Is There So Much Confusion In
Practice? (cont)
 All the confusion has to do with the timing of the settlement
period. Many investors think they just need to buy the stocks
on or before the record date in order to collect the dividend.
The truth is they have to make the purchase three business
days before the record date.
 The ex-date is an artificial creation of brokerage firms to
mathematically figure out the purchase date that makes you
owner by the record date. If the company announces a March
10 record date, the ex-date would be March 8. If you buy the
stock on March 8 or later, you will not be the owner of the
stock by the record date ( won’t receive the next dividend
payment)
Why Is There So Much Confusion In
Practice? (cont)
 After understanding the stock settlement process, adding call
options to the figure is not complicated. If you own a call
option and wish to exercise it in order to collect the dividend,
you must exercise the call the day before the ex-date.
Does It Really Matters If The Stock Holders
Get The Dividend?
 Mathematically, there is no difference if stockholders get the
dividend or not. The reason there is not mathematical
difference is that the stock price is reduced by the amount of
the dividend on the ex-date.
 For instance, if an investor buy one share of stock for $100
before the ex-date and collect a dividend payment of $2, on
the ex-date the stock will decline to $98 and the total value of
his account will remain the same: $98 + $ 2= $100.
Rules Violation: Selling Dividends
 Many brokers take advantage of investors by touting an
immediate return on your money by purchasing stock just
before the ex-date. A broker may call saying if you purchase a
stock for $100, you will receive a 2% return on your money the
very next day. By now you should know this is not true.
 For tax reasons, buying the stock just to get the dividend is not
a good idea. When an investor buys on share of stock for
$100, he is paying with after-tax dollars, he doesn’t owe tax on
the $100. However, if you buy the stock before the ex-date you
will owe taxes on the dividend payment.
Rules Violation: Selling Dividends (cont.)
 For these reasons the NASD (National Association Of Security
Dealers) prohibits brokers of selling you stocks exclusively for
the reason of collecting the dividend.
Types of Options Orders
 To understand the many terms associated with placing orders
is crucial, particularly in today’s market when most people
make trades online and there is no interaction with a broker.
Making the Trade
 There are five basics pieces of information you must specify
when you are buying or selling options:
 Action (buy or sell)
 Quantity (number of contracts)
 Symbol
 Price
 Time
Types of Options Orders
 The action, quantity and Symbol are all basic and don’t need
explanation. But price and time fields are the ones that create
the most questions and unexpected surprises.
Price
 When placing an order to buy or sell, you must provide some
information about the price at which you are willing to make
the deal. There are two ways to provide price information:
 Market Order
 Limit Order
Types of Options Orders
Market Order
 A market order guarantees that your order will be filled but
does not guarantee the price at which the transaction will be
made. If you place an order to buy option calls “At market” you
know for sure that you have purchased the calls, but in order
that is transaction to be guaranteed, it means that you must
be flexible on the price. “ A market order guaranteed the
execution but not the price”.
Types of Options Orders
Multiple Fills
 If you place an order, it is possible that the order comes back
filled at multiple prices. This means the traders were only able
to get a certain number of contracts at one price and had to fill
the balance at one or more prices.
Limit Orders
 A limit order is one where the price is specified. When buying
options, the order cannot be filled at a price higher than your
limit price. When selling options, the order cannot be filled at
a price lower than your limit price. “Limit orders guarantee the
price but not the execution”
Types of Options Orders
Tick Size
 The tick size are the minimum amounts that the price can
change when submitting option orders. There is a five-cent
ticked size for the option orders at the current price and below
and a ten-cent ticked size for option orders above the current
price.
 Why is not possible to guaranteed the execution and price?
 If both, execution and price could be guaranteed, investors
could buy an expensive option for a very low price an then sell
it at a higher price, which is simply not possible.
Types of Options Orders
Or-Better Orders
 An or-better order qualifier is a type of limit order where your
buy price is stated above the current market price and your
sell limit is placed below the current market price. This type of
order reduces the risks of the market and limit orders.
All-or-None (AON)
 When an investor do not wish to get a partial fill, he could
place all-or-none restriction in his order. This just tells the
market makers to not fill your order until they can fill the
entire number of contracts you requested.
Types of Options Orders
Time Limits
 In addition to setting a price when entering your order, you
must also specify the time limit for which the order is good.
This is true for any bid to buy or offer to sale. There are to
basic choices for time limits:
 Day Order
 Good ‘til Cancelled (GTC)
Types of Options Orders
Day Orders
 This type of order is only good for the trading day. When
placing an order after the market close, then it will be good
only for the following business day. Any market order can only
be entered as “day order” for the fact that markets orders are
guaranteed to fill.
Good ‘til Cancelled Orders
 Good ‘til cancelled orders may only be used for limit orders.
“GTC” orders can be a useful tool that keeps you from having
to retype orders that do not fill.
Stop limit order
 Stop orders are conditional orders to buy or sell at market. Your stop
price is simply a price at which point the trade is triggered (technically
elected), which makes it a live market order, in which the execution is
guaranteed but not the price. Your order will be triggered if the stock
trades at or below your stock price.
 A stop limit order is an extension of a stop order. The difference is that
stop limit orders convert to a limit order, which means your shares will
be sold only if the limit price or higher can be and guarantee a price.
But as with any limit order, if you guarantee the price, you cannot
guarantee the fill.
 In order to place a stop limit order, you must specify two prices. The
first price is the stop price. Once you specify the stop price you must
then specify a stop limit price (which must be less than or equal to your
stop price).
Which should you use?
If your stock opens below your stop price do you want
to sell the shares at any price? Is your goal to simply get
rid of the shares regardless of price? If the answer is
yes, then use a stop order. However, if there is a price at
which you’d rather hold onto the shares rather than
sell then use a stop limit order.
Option Stop Order: difference
Options stop orders and stop limits are not based on
the last trade. The reason is that it is possible to not
have any trades on the option even if the stock price is
falling. However the bid price and asking prices on the
options will definitely change in response to the falling
stock price.
Understanding the Quote system
 Assume the market is not open yet and the maker has no orders on the
books. When orders are placed through the various brokerage firms,
the market maker will accumulate them in a specific manner. Assume
that the first order is an order to buy 5 contracts at a limit of $1.90.
Because this is an order to buy, the market maker will list it under the
“bid” column. Assume that the next order is an order to buy 10
contracts at a limit of $2.00. Because this is another buy order the
market make will place it under the bid column as well. However, this
trader is considering a stronger buyer since his buy price is higher than
the person at $1.90 the markets are only concerned with the highest
bidder and lowest offer.
 Notice how the orders are being stacked. The bids are being stacked in
descending order from strongest to weakest; that is, from highest to
lowest. The sellers are stacked in ascending order from strongest to
weakest, that is, from lowest to highest.
Understanding the Quote system
(Cont.)
 The process continues until all the orders are on the books. Of course,
the final list will be quite long, but the entire system is automated so it
happens very quickly.
 The difference between the bid and ask is called the bid asked spread
or, more simply, the spread. The market makers must be ready to keep
a liquid and orderly market when one is not available. If the market is
quite liquid and competitive, it is possible that the inside quote is
strictly due to retail traders. While the market makers usually have
some presence at the bid and ask, it is possible that it is represented by
only retail traders at certain times.
 Higher bids and lower offers will reduce the spread between the bids
and ask. Higher bids attract sellers and lower offers attract buyers, both
create more contracts traded in the marketplace.
Limit order display rule
 In order to ensure that higher bids and lower offers would be shown;
the exchanges created the “Limit Order Display Rule”, which we can use
to our advantage once you understand how it works.
 The limit order display rule, sometimes called the “Show or Fill Rule” is
not a rule that the market makers make very well known for obvious
reasons, as we shall soon see. However, knowing this rule can make a
big difference in your option profits. It works: let’s assume you wish to
place an order to buy 2 contracts. You don’t wish to pay the current
asking price of $2.25 so you put in an order for something between the
bid and ask, say $2.15. When the market maker receives the order, he
now has one of two choices: He can either fill the order or show the
order. If he chooses to not fill the order, he must show it by allowing
you to jump in front of the line. The narrower the spread, the more
efficient the market. The limit order display rule was created for that
very reason. Before the rule, market makers could hide your order from
the public and just leave the quote at bid 2.00 and ask 2.25.
Advantages
 Having the ability to compete with market makers and their
quotes is certainly an advantage, you can provide a stronger
incentive for someone to sell at the new higher price, and there is
a better chance that you will get filled. And there’s an additional
advantage you can gain. There is an exchange policy that all
quotes must be good for at least 20 contracts. It is up to the
market makers to make sure that all quotes are good for at least
20 contracts, and we can use that to our advantage.
 Think of what a difference that trading between the bid and ask
can make on your trades, especially when you consider that it
works for the sell side, too. Whether you are buying or selling a
small number of contracts, you have an advantage of submitting
limit orders between the bids and ask.
Rule when you are trading options
If you are trading small number of contracts, say up to
seven, there is a very good chance you can trade
between the bid and ask and get filled for no other
reason than the market maker wanting to avoid the
additional liability of having to complete the 20contract exchange rule.
All-or-non- restrictions
 All-or-non- restrictions, especially for less than 50 contracts; If you place an
order will an all-or-none restriction, you’re telling the market maker that he
can only fill the order in its entirety, he cannot come back with a partial fill.
Because of this, many options traders believe that they should mark all orders
with an all-or-none restriction to prevent partial fills. However there is the
danger that the market is not required to show your order if it is marked all-ornone.
 If you’re placing larger quantities of contracts its best to do one of 2 things.
First, you can feed your contracts into the market in smaller lots, perhaps
placing four trades of five contracts each. Many brokers though will charge 4
separate commissions to do this, so it may not be advantageous. But if your
broker aggregates all orders by symbol and side (buy or sell) at the end of the
day, this may be a visible choice for you. The second thing you can do is mark
your order with a “not held” qualifier, which means you are not holding the
floor broker accountable to “time and sales”. If you do not mark an order as
“not held”, you can hold the broker accountable.
Spread behavior
 Why do some option quotes have relatively small spreads, say 5
cents, while other have much wider spreads such as 20 cents?
Many traders believe this is the market maker “playing games” or
trying to “squeeze out” extra money from the more active
options. The spread is simply a reflection of the volume. Lower
volume options have higher spreads, while higher volume
options have narrow spreads.
 To show how the supply of an option is created. If you want more
supply, you (or the market maker) must bid the contract higher.
The higher the price, the more sellers will step in and unload
contracts. Traders often have difficulty understanding how they
can control the supply. Price is the answer.
Market clearing price
A market clearing price is the price where all who want
to buy and sell at that price can do so. In an example, a
price of $4 means that 50 contracts will be purchased
and sold. If the price were higher, we’d get more sellers
than buyers. If the price were lower, we’d get more
buyers than sellers. At a price of $4, there are an equal
number of buyers and sellers and the market clears
Option Price
In the real world of options, we do not just have a
single price. Instead, we have a bid-ask spread, which
tends to reduce the value. However because of the
two-price system, we can find an equilibrium point
and the market can clear. The wider the spread, the
lower the volume. Conversely, the lower the volume,
the wider the spread must be to balance supply and
demand. So the bid-ask spread is purely a function of
the supply and demand for an option.
Disclaimer

DISCLAIMER: THE DATA CONTAINED HEREIN IS BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED
AS TO RELIABILITY, ACCURACY, OR COMPLETENESS; AND, AS SUCH ARE SUBJECT TO CHANGE WITHOUT
NOTICE. WE WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH MAY RESULT FROM RELIANCE ON THIS
DATA OR THE OPINIONS EXPRESSED HERE IN. DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING
FUTURES, FOREX AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD
BE USED. FUTURES, FOREX AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS,
AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER
TO TRADE. OPTION TRADERS SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT
IN A FUTURES OR FOREX POSITION.HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT
LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY
ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT,
THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND
THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE
LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH
THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL
RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF
FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE
TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN
ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED
TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM
WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE
RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PS. In our opinion, we
believe, it may be possible, that heavy smoking and drinking may be hazardous to your health. If you choose to smoke
and drink while trading, The Delano Max Wealth Institute nor Dr. Scott Brown is liable for any damage it may cause. If
you slip and fall on the ice, we're not liable for that either.