By: Steve Smith
Many people’s lives have been turned upside down by staying at home or sheltering in place — they are looking for diversions.
And while it might be tough to watch the daily gyrations of the stock market, this could be a good opportunity to step back and use the extra free time to bone up on their financial education. Especially in the area of options so when things return to normal you’ll have more investment tools at your disposal or when the next crisis emerges you’ll be better prepared.
As with any tool, before using options, make sure you are familiar with the basic rules and guidelines that govern their behavior.
For starters, make sure you know the contract specifications of the product you are trading. Items such as margin requirements (pay special attention to leverage), the exercise and settlement procedures, and what strikes and expirations are currently listed for trading are important to know.
For example, you should be aware that index options, such as for those on the S&P 500 or SPX, can only be exercised on expiration day and are cash-settled; also note that SPX options actually cease trading on the third Thursday of the month, a day earlier than equity options, though they officially expire on the third Saturday. By contrast, equity options, including those on the Spyder Trust (SPY), can be exercised at any time during the life of the contract. This is especially important when trading options on stocks that pay dividends.