Before you trade options, you need to understand exactly what you are buying or selling. Every options contract has specific terms that define its characteristics. These contract specifications tell you everything from how many shares the contract controls to when it expires.
What Are Contract Specifications?
Contract specifications are the standardized terms that define an options contract. They include the underlying asset, contract size, strike price, expiration date, and exercise style. Exchanges standardize these specifications so that buyers and sellers can trade efficiently.
The simple version: Contract specs are the rules of the game. They tell you exactly what you own when you buy an option and what you are obligated to do if you sell one.
Contract Size and Multiplier
For standard equity options in the United States, one contract controls 100 shares of the underlying stock. This is called the contract multiplier.
How the Multiplier Works
A call option on Stock XYZ has a premium of $2.50.
- Contract multiplier: 100
- Cost of one contract: $2.50 x 100 = $250
- If you buy 5 contracts: $250 x 5 = $1,250
Always multiply the quoted premium by 100 to get the actual cost.
Non-Standard Contracts
Sometimes contracts have different multipliers due to stock splits, mergers, or special dividends. These are called adjusted or non-standard options. For example, after a 3-for-2 stock split, a contract might control 150 shares instead of 100.
Always check contract specifications if something looks unusual. Non-standard options can have liquidity issues and wider spreads.
Underlying Asset
The underlying asset is what the option gives you the right to buy or sell. For equity options, this is typically 100 shares of a specific stock.
Options exist on many underlying assets:
- Equity options: Individual stocks (AAPL, TSLA, SPY, etc.)
- Index options: S&P 500 (SPX), NASDAQ (NDX), VIX
- ETF options: QQQ, IWM, XLF
- Futures options: Options on commodity futures
Strike Price
The strike price is the price at which you can buy (for calls) or sell (for puts) the underlying asset. Exchanges list multiple strike prices for each expiration date.
Strike Price Intervals
Strike prices are listed at regular intervals, typically:
- Stocks under $25: $0.50 or $1 increments
- Stocks $25-$200: $1, $2.50, or $5 increments
- Stocks over $200: $5 or $10 increments
- High volume stocks: Often have more strike prices available
Strike Price Example
Stock ABC trades at $52. Available strikes might be:
- $45, $47.50, $50, $52.50, $55, $57.50, $60
For a $500 stock, strikes might be: $480, $490, $500, $510, $520
Expiration Date
The expiration date is the last day the option can be exercised or traded. After this date, the option ceases to exist.
Types of Expirations
- Standard monthly: Third Friday of each month (or Thursday if Friday is a holiday)
- Weekly options: Expire every Friday (Monday for some index options)
- Quarterly options: Expire on the last business day of each quarter
- LEAPS: Long-term options expiring 1-3 years out
Expiration Times
The actual expiration time varies:
- Equity options: 4:00 PM ET on expiration day
- Index options: Varies (some are AM-settled, some PM-settled)
- Exercise notices: Must be submitted by 5:30 PM ET on expiration day
Option Symbols
Options use standardized symbols that contain all the key information. The OCC (Options Clearing Corporation) format is:
Symbol: AAPL240119C00150000
Decoding an Option Symbol
AAPL240119C00150000 breaks down as:
- AAPL: Underlying stock (Apple)
- 24: Year (2024)
- 01: Month (January)
- 19: Day (19th)
- C: Call option (P for put)
- 00150000: Strike price $150.00
This is an Apple January 19, 2024 $150 call option.
Exercise Style
Options have different exercise styles that determine when you can exercise them.
American Style
Can be exercised any time before expiration. Most equity options are American style.
European Style
Can only be exercised at expiration. Many index options (like SPX) are European style.
For most traders, the exercise style rarely matters because options are usually sold rather than exercised. However, it does affect pricing and early assignment risk.
Settlement Type
Settlement determines what happens when an option is exercised.
Physical Settlement
The underlying shares actually change hands. You receive (or deliver) 100 shares per contract. This is how most equity options settle.
Cash Settlement
Instead of shares, you receive the cash value of the difference between the strike and settlement price. Index options like SPX are typically cash-settled.
Cash vs. Physical Settlement
You own a $100 call. At expiration, the underlying is at $105.
- Physical settlement: You receive 100 shares at $100 each (then can sell at $105)
- Cash settlement: You receive $500 cash ($5 x 100 shares)
The economic result is the same, but the mechanics differ.
Position Limits
Exchanges set maximum position sizes for options. These limits prevent any single trader from controlling too much of the market. Position limits vary by underlying and can be substantial for retail traders.
Trading Hours
Regular options trading hours are 9:30 AM to 4:00 PM Eastern Time. Some options have extended hours trading:
- SPY, QQQ, IWM: Extended hours available
- Most equities: Regular hours only
- VIX options: Extended hours available
Minimum Price Increments
Options are quoted in specific minimum increments:
- Options priced under $3: $0.01 increments (penny pilot)
- Options priced $3 and above: $0.05 increments (some still $0.01)
The penny pilot program has expanded to include most actively traded options.
Why Contract Specifications Matter
Understanding contract specifications helps you:
- Calculate costs correctly: Always multiply premium by 100
- Choose appropriate strikes: Know what intervals are available
- Plan around expiration: Understand when your options expire
- Avoid surprises: Know if you are trading non-standard contracts
- Manage risk: Understand assignment and settlement procedures
Track All Your Options Contracts
Pro Trader Dashboard automatically tracks contract specifications for all your positions. See expiration dates, strike prices, and position sizes at a glance.
Summary
Options contract specifications define everything about an options contract: the underlying asset, contract size (usually 100 shares), strike price, expiration date, exercise style, and settlement method. Understanding these specifications is essential for trading options correctly and avoiding costly mistakes.
Ready to learn more? Check out our guide on American vs. European options or learn about options settlement.