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Options are traded in contracts.

Equity options usually represent contracts to buy or sell 1,000 of the underlying shares. Contracts may have to be adjusted if there is a stock event which affects the share structure of a company upon which traded options are listed, for example a rights issue or bonus issue.

»Ê¹ÚÌåÓýapp purchaser of an option has to pay a premium for buying the contract.

For an equity option the amount of the premium is expressed as a value per share.

EXAMPLE

Mr Smith wants to buy options to buy 10,000 XYZ PLC shares at an exercise price of 260p expiring in January. »Ê¹ÚÌåÓýapp current premium is 24p per share. He places an order to buy 10 January 260p call contracts. Each contract cost 1,000 x 24p = £240. »Ê¹ÚÌåÓýapprefore ten contracts cost £2,400.

For an index option premiums are quoted in index points. »Ê¹ÚÌåÓýapp cost of the contract is the premium in index points multiplied by £10.

EXAMPLE

If the cost of June 5300 FTSE 100 call options stands at 200 index points, the cost of one contract is 200 x £10 = £2000.