Stock option strike price increments?

Question

I need an explanation about stock option strike prices. Once an option reaches/exceeds it's strike price-the price of the contract moves up in certain increments. What are the increments? $10 for every one penny move or what? I AM NOT INTERESTED IN HEARING ABOUT GAMMA AND DELTA a simple explanation will do.

Answer 1

It all depends on the length of the contract. The longer the contract the higher the increments it moves up. There is no set equation to determine how much it will increase, the market will determine that.

Answer 2

I am not sure I understand your question.

If you are asking about strike increments, the general rule is $2.50 for strike prices under $25.00, $5.00 for strike prices over $25.00. Over $100 the strike increment may go up to $10.

However, the general rule does not always apply. some low-cost more-liquid options have been designated to have $1.00 increments between strike prices. Also, anyone may request additional strike prices be added at any time.

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If you are asking about bid and ask increments, midwestgirl gave you the correct general rule. Below $3.00 bid and ask must be in increments of $0.05 and above $3.00 they must be in increments of $0.10.

Once again the general rule does not allways apply. here is a copy of a press release from earlier this year:

On Friday, January 26, 2007, the six options exchanges will begin a pilot program to trade options in one-cent increments. The pilot will initially include 13 stocks and exchange-traded funds (ETFs). The one-cent ($0.01) increments will be available for options with a quoted price of less than $3.00. Options with a quoted price above $3.00 will be available in nickel ($0.05) increments. All QQQQ options, however, will be quoted in one-cent increments..

The pilot program consists of the following securities:

IWM - iShares Russell 2000® Index
QQQQ - Nasdaq-100® Trust Shares
SMH - Semiconductors HOLDRs
GE - General Electric Co.
AMD - Advanced Micro Devices Inc.
MSFT - Microsoft Corp.
INTC - Intel Corp.
CAT - Caterpillar Inc.
WFMI - Whole Foods Market Inc.
TXN - Texas Instruments Inc.
A - Agilent Technologies Inc.
FLEX - Flextronics International Ltd.
SUNW - Sun Microsystems Inc.

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If you are asking how fast the option price changes as a result of a change in the price of the underlying, as double_down assumed, the general rule is:

If the option is deep in the money the option price will change at almost the same rate as the underlying,

if the option is far out of the money the option price will change react very little in response to a change in the underlying, and

if the option is roughly at the money you can expect the option price to change at about half the rate as the underlying. For example, if a stock goes from $50.00 to $50.02 you can expect the value of call $50 call option to go up $0.01 and the value of the $50 put option to go down $0.01.

Answer 3

Yes, once the option contract has reached its strike price, the option can be exercises. If you don't reach the strike price then you're not making money. There are bids/ask prices on options that have not reached their strike because these traders want to get out of the position they have taken on whatever contract they have. You can buy the contract if you feel that a commodity will go to that strike price. So, yes options can be traded for profit/loss even when they are out of the money.

Answer 4

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Answer 5

Sadly the answer on this IS about delta and gamma. The rate at which the option changes compared to the stock, also changes as the stock move one way or the other.

So you have a rate of change that is changing. That's delta and gamma.

Answer 6

If you're not interested in hearing about gamma and delta then I can't help you. If it were easy then everyone would be using options. It's requires a little thougth and that requires talking about delta.

Answer 7

From what I have read if the option price is less than $3.00 option price increments will be .05 cents and more than $3.00 option price increments will then be .10 cents.