Terms of the contract

Every options contract is defined by certain characteristics, or standardized terms, including:

Contract size. For stock options, the number of shares of the underlying interest covered by the contract is usually set at 100.

Expiration month. There are four expiration months available for each option: two in the near term and two farther away.

Exercise price. The available strike prices for an option may be 1, 2 1/2, 5, or 10 points above and below the current market price of the underlying interest, depending on how low or high the market price is.

Type of delivery. Most stock options are physical delivery contracts, which means that shares of stock must change hands at the time of exercise. Other contracts are cash settled, which means delivery is in cash.

Style. Options that can be exercised at any point before expiration are American style. Options that can be exercised only on the day before expiration are European style.

Adjustment provisions. Representatives from each exchange determine any adjustments that might be made to the terms of a contract in response to a stock split, for example.

An options class is all the calls or all the puts on a given underlying security. Within a class of options, contracts share some of the same terms, such as contract size and exercise style.

An options series is all contracts that have identical terms, including expiration month and strike price. For example, all XYZ calls are part of the same class, while all XYZ February 25 calls are part of the same series.

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