Option Class: Definition, Functionality, and Example

August 24, 2024 3 min read Investments Finance Stock Markets Options Trading Finance Derivatives Stock Market

An in-depth look at option classes, their structure and role in financial markets, including a practical example.

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Definition

An option class consists of all the call options or all the put options for a particular underlying asset listed on an exchange. These financial instruments are vital components of the larger option chain, providing traders with the means to speculate on or hedge against price changes in the underlying asset.

Structure and Functionality

Types of Options

Options are primarily categorized into two types:

Call Options: These give the holder the right, but not the obligation, to purchase the underlying asset at a specified strike price within a predetermined time frame.
Put Options: These give the holder the right, but not the obligation, to sell the underlying asset at a specified strike price within a predetermined time frame.

An option class, therefore, groups together all the call options or all the put options for a given underlying entity, such as a stock, index, or commodity.

Example of Option Classes

Consider a stock like Apple Inc. (AAPL). An option class for AAPL would include all call options available for different strike prices and expiration dates. Similarly, another option class would include all put options for AAPL.

#Examples of Option Classes for AAPL:

- Call Options: AAPL210917C00140000, AAPL210917C00145000, etc.
- Put Options: AAPL210917P00140000, AAPL210917P00145000, etc.

Historical Context

Options trading traces back to ancient times, but it evolved significantly with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. The modern structure of option classes was created to streamline the trading process and provide transparency for traders.

Comparing Option Classes and Option Chains

Option Chain

While option classes group together similar types of options for an underlying asset, an option chain provides a list of all available options (both calls and puts) for that asset. The chain includes a comprehensive view of prices, strike prices, expiration dates, and additional relevant details.

Applicability

Trading Strategies

Traders utilize option classes to devise strategies such as spreads, straddles, and strangles. Understanding the specific class helps in selecting the right options for these complex strategies.

Strike Price: The predefined price at which the underlying asset can be purchased or sold.
Expiration Date: The date on which the option expires and is no longer valid.
Premium: The price paid for purchasing the option.

FAQs

What is the primary purpose of option classes?

Option classes simplify and organize the trading process, allowing traders to efficiently select and trade options within defined parameters.

How are option classes and series related?

An option series is a subgroup within an option class, sharing the same strike price and expiration date. For example, all AAPL call options expiring in September with a strike price of $145 form a series within the call option class for AAPL.

References

Chicago Board Options Exchange (CBOE)
Hull, John C. “Options, Futures, and Other Derivatives.” Pearson, 2017.

Summary

Option classes are essential for structuring and organizing the trading of options, grouping together all calls or all puts for a particular underlying asset. By understanding option classes, traders can efficiently navigate the financial markets, employing various strategies to maximize their potential returns.