What Is an Optionable Stock?
Let me explain what an optionable stock really is. It's a stock where the shares have the kind of liquidity and trading volume that convinces an exchange to list options for it. For a stock to qualify as optionable, it has to satisfy specific criteria set by the exchanges, like a minimum share price, a certain number of outstanding shares, and a minimum number of unique shareholders, among other things.
Key Takeaways
Here's what you need to know right away: An optionable stock means there are options listed on it that you can trade. To get there, the stock must hit the minimum standards from the exchanges. Right now, you'll find almost 6,000 companies with optionable stocks, plus several hundred exchange-traded funds (ETFs) that also have listed options. If a stock isn't optionable, hedging your positions in it becomes a lot tougher, which complicates managing the risks.
Understanding Optionable Stocks
When I talk about an optionable stock, I'm referring to one that has options listed and ready to trade on a market exchange. Not every publicly traded company has these exchange-traded options available. That's partly because they need to meet minimum requirements, such as a certain share price and amount of outstanding shares.
At present, there are nearly 6,000 companies with optionable stocks, along with hundreds of ETFs that offer listed options. Being optionable lets you buy options on the underlying stock, which gives you the right to buy or sell shares at a predetermined price.
For stocks that aren't optionable, hedging gets more complicated and makes risk mitigation harder. In those cases, you can work with your broker-dealer to set up an over-the-counter (OTC) options contract.
These days, it's straightforward to check if a stock has listed options. Just head to the Cboe Options Exchange website and see if options are listed for that particular stock.
Requirements for a Stock to Be Optionable
To have options listed on a stock, it must meet specific criteria under current Cboe rules. There are five main ones you should be aware of.
Primary Criteria for Optionable Stocks
- The underlying equity security must be listed on a recognized exchange like the NYSE, AMEX, or Nasdaq—it can't be over-the-counter, such as on pink sheets or OTCBB.
- The closing price of the company's shares must have a minimum per-share price for most trading days in the three prior calendar months, currently $3.00 for covered securities or $7.50 for non-covered ones.
- There must be at least 7,000,000 shares of the underlying security owned by persons not required to report under Section 16(a) of the Securities Exchange Act of 1934.
- The company needs at least 2,000 unique shareholders.
- The average trading volume across all markets must be at least 2,400,000 shares in the preceding 12 months.
Additional Notes on Requirements
If a company misses even one of these criteria, exchanges like Cboe won't allow options trading on that security. Also, due to the price condition, no company can have options traded until at least three months after its IPO.
Fast Fact
Remember, this information isn't tax, investment, or financial advice. It's presented without considering your specific objectives, risk tolerance, or circumstances, and it might not suit everyone. Investing always carries risks, including potential loss of principal.
