Equity Options
Equity options are options on individual stocks, providing flexible tools for directional trading, income generation, and portfolio hedging.
Equity options (also called stock options) are contracts on individual company shares. Each standard contract represents 100 shares of the underlying stock. Equity options in the U.S. are American-style, meaning they can be exercised at any time before expiration. They physically settle, delivering or requiring delivery of shares upon exercise. Equity options trade on exchanges like the CBOE, NYSE Arca, and NASDAQ PHLX, with standardized strike prices and expiration cycles.
An equity option on JPM with a $160 strike represents the right to buy or sell 100 shares of JPMorgan Chase. If you buy a JPM $160 call for $4.00, you control $16,000 worth of JPM stock for a $400 premium. If JPM rises from $160 to $175, the call might be worth $15.00, giving you an $11.00 profit per share ($1,100). If JPM falls, your loss is limited to the $400 premium. Key contract specifications include the strike interval ($1 or $2.50 for lower-priced stocks, $5 or $10 for higher-priced), the expiration cycle (weekly or monthly), and the settlement method (physical delivery).
Equity vs. Index Options
The key differences between equity and index options center on exercise style, settlement, and tax treatment. Equity options are American-style (early exercise possible), physically settled (shares change hands), and taxed as regular capital gains (short-term or long-term based on holding period). Index options are European-style (no early exercise), cash settled, and may qualify for 60/40 tax treatment under Section 1256. Equity options also involve dividend risk, as short call holders may be assigned ahead of ex-dividend dates to capture the dividend.
Liquidity and Strike Selection
Liquidity varies significantly across equity options. The most liquid options include those on SPY, AAPL, MSFT, AMZN, NVDA, TSLA, and GOOGL. For these names, bid-ask spreads are tight (often pennies wide) and open interest is high. For smaller companies, options may have wide spreads and low volume, making them expensive to trade. Standard strikes are listed at regular intervals: $1 or $2.50 for stocks under $100, $5 for stocks $100-$200, and $10 for stocks above $200. Mini-options (10 shares) are available on select high-priced stocks.
FAQs
What happens if my equity option is assigned?
If you're short a call and assigned, you must deliver 100 shares per contract. If short a put, you must buy 100 shares. Your broker will notify you and the positions will be settled in your account the next trading day.
Can I trade equity options in any account?
Most brokerage accounts support equity options trading, but you need options approval from your broker. Approval levels range from Level 1 (covered calls) to Level 4 (naked options) based on experience and net worth.
How do dividends affect equity options?
Ex-dividend dates can trigger early assignment on short calls as the option holder may exercise to capture the dividend. Put options typically decrease in value after ex-dividend because the stock price drops by the dividend amount.