Just one more parameter definition before we introduce you to some live option screens.
Remember in our previous examples we used a fictional stock XYZ, and defined the price and any payments on a per share basis. When trading options it is also important to understand how many shares (or how many units of the asset) an option contract represents.
This number is called the option contract multiplier. It can vary from product to product, but there are some common multipliers used across different groups of assets. No matter which exchange or product you are trading, this detail should be available in the contract details, but we’ll go through a couple of examples now.
Equity (stocks/shares) options typically have a multiplier of 100. This means that 1 option contract controls 100 shares of the underlying stock. Take the example of the physically settled call option from the previous lecture. The trader purchased a call option for stock XYZ with a strike price of $50. They then exercised their option to buy XYZ at $50 per share. The multiplier is 100, so this option contract controls 100 shares of XYZ. Therefore, when the trader exercises the option, they will pay $5,000 (which is calculated as the $50 strike price multiplied by the 100 multiplier), and they will receive 100 shares of XYZ.
The bitcoin options on Deribit have a multiplier of 1. This means that 1 option contract controls 1 bitcoin. Let’s say a trader holds 1 bitcoin call option with a strike price of $10,000. The bitcoin options on Deribit are European options, so they cannot be exercised early, and are exercised automatically when they expire. These options are also cash settled, which as you may remember from the previous lecture, means the difference between the current price and the strike price is what is paid in cash to the option buyer.
So, let’s assume this $10,000 call option expires when the price of bitcoin is $11,000. As it’s cash settled, the call option buyer receives the difference between the current price of $11,000 and the strike price of $10,000, which of course is $1,000. The multiplier is 1, so they receive $1,000 in total.
There will be plenty more examples detailing the exercising and closing of option positions later in the course, so don’t worry if you’re not completely comfortable with this concept yet.
When trading a new product, or on a new exchange, make sure you read any relevant documents. You should familiarise yourself with the contract details so you know how the products you’re planning to trade are structured. Before you begin trading options you should have an understanding of derivatives contracts and the basic option contract parameters. You should also know whether the options you’re planning to trade are European or American style options, physically or cash settled options, and the contract multiplier.
Well done for making it through these first definitions! It’s important to have this base level of knowledge to build on, but of course it’s difficult to learn everything about options just from definitions. There is so much to learn that gaining some practical experience along the way will help you retain the information. That doesn’t mean you have to put any funds at risk straight away, but it is useful to at least familiarise yourself with the trading platform you plan to use while you’re learning. With that in mind we will now take a look at some live option chains on several different exchanges. Being able to comfortably find your way around an option screen will speed up your learning as you progress.