Options & Derivatives Trading

Option series

What is an option series?

An option series is a group of options on the underlying security with the same specified strike price and the same expiration month. However, calls and puts are part of a different family. For example, a call option series would include available call options on a specific security at a specific strike price that expire in the same month.

key takeaways

  • An option series is a set of options on a given underlying security with the same specified strike price and the same expiration month.
  • Since an option series contains calls or puts on the same security that expire at the same time at the same price, their prices should be very similar.
  • Investors will find multiple option series listings within an option class, which designate the option as either a call or a put.
  • The options family offers traders a variety of ways to make money.

Understanding the Options Series

Since an option series contains calls or puts on the same security that expire at the same time at the same price, their prices should be very similar. For example, all Apple calls with a $150 strike price on January 20, 2023 should cost roughly the same. However, options are highly volatile and have liquidity issues, which can create opportunities for traders. The actual price observed on an option is sometimes very different from the value given by the Black Scholes model.

Despite many deviations from actual option prices from their theoretical values, most of these opportunities are too small for individual investors to make significant profits.

Investors will find multiple listings of option series within the specified option category. Option class refers to the option designation as call or put. Typically, most options exchanges list options by category. Thus, an investor seeking to buy a call option on the underlying security is presented with a long list of call option series, each with its own individual strike price and expiration date. Likewise, investors seeking put options on the underlying security will first look at the different strike and expiration put classes listed for all series.

All option series are also part of an option cycle. For example, Company XYZ might have a call option with a strike price of $110. When the option is listed, one of three cycles can be assigned:

  • cycle one: JAJO – January, April, July and October
  • cycle two: FMAN – February, May, August and November
  • third cycle: MJSD – March, June, September and December

Exchange-traded options follow their designated cycle, listing the first two months and the following two months. If the XYZ $110 call was the third period, then in January it would have the following list: XYZ 110, XYZ 110, XYZ 110, XYZ 110. Each listing will be considered a separate option series, with four option products representing option periods. Most exchange-traded options series listings expire on the third Friday of their listing expiry month.

Option series trading on regulated exchanges is backed by a third party that fulfills the options contract in the event of a default. Therefore, options investors need not worry too much about the counterparty risk of publicly traded options. In the event of a potential counterparty default, this third party will step in to cover its position. The Option Clearing Corporation (OCC) is probably the best-known third party for option guarantees.

special attention items

The options family offers traders a variety of ways to make money. The options series consists of options contracts covering 100 shares of the underlying security. However, options can be traded on a larger set of contracts. As with stocks and most other commodities, there is a price difference between buying and selling in bulk versus buying and selling in small quantities. Arbitrageurs can profit from the resulting price differences.

Sometimes the price of an option deviates from what economic theory says it should be. When markets are unstable, anomalies such as the swing smile become more apparent and create more profit opportunities. By understanding how options are priced, traders can better exploit price deviations in an option series.

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