An optionable stock is one where the shares possess adequate liquidity and trading volume such that an exchange lists options for trading on those stocks. In order for a stock to be optionable, specific criteria need to be met, including a minimum share price, number of shares outstanding, and a minimum number of unique shareholders.
Key Takeaways
- An optionable stock has listed options available for trading.
- Exchanges set minimum requirements for a stock to be optionable.
- Nearly 6,000 companies, along with several hundred exchange-traded funds (ETFs), have stocks with tradable options.
- Stocks without options make it challenging to hedge positions, thus raising the risk involved.
Understanding Optionable Stocks
Optionable stocks come with the possibility of listed and tradable options on a market exchange. Not every publicly traded company has exchange-traded options due to certain minimum requirements such as a minimum share price and minimum outstanding shares. Currently, nearly 6,000 companies and several hundred ETFs have optionable stocks. Investors in optionable stocks can buy or sell shares at a set price through options contracts.
Stocks without options are riskier to hedge, hence investors sometimes use over-the-counter (OTC) options contracts written with their broker-dealer.
Easy Check for Optionable Status
You can easily look up whether a stock has listed options by visiting major stock trading websites like the Cboe Options Exchange site, which lists options for particular stocks.
Requirements for a Stock to Be Optionable
For a stock’s options to be listed, it must meet specified criteria laid down by exchanges like the Cboe. Here are the five primary criteria:
- Exchange Listing: The equity security must be listed on recognized exchanges such as NYSE, AMEX, or Nasdaq. OTC traded securities do not qualify.
- Minimum Price: The company’s shares must have a minimum closing price for the majority of trading days over the past three months. The minimum price is $3.00 per share for “covered securities” or $7.50 per share for non-covered securities.
- Outstanding Shares: The company must have at least 7,000,000 shares owned by non-Section 16(a) reporting persons.
- Unique Shareholders: There should be at least 2,000 unique shareholders.
- Trading Volume: The trading volume should average at least 2,400,000 shares across all markets over the preceding 12 months.
If even one criterion is not met, options cannot be traded on the stock. Also, a company must wait at least three months after its initial public offering (IPO) before having options traded.
Note: Always consider investment strategies, risk tolerance, and financial conditions before investment. Investing involves risk, including potential principal loss.
Related Terms: liquidity, exchange-traded funds (ETFs), hedging, initial public offering (IPO).
References
- Barchart. “Optionable Stocks by Sector”.
- Cboe. “Cboe Options Exchanges”.
- Cboe. “Rules of Cboe Exchange, Inc.”, Pages 90-91.
