What Is an Optionable Stock?
- An optionable stock is one where the stock has the necessary liquidity such that a market maker, like a bank or an accredited financial institution, lists that stock's options for trading.
- Currently, there are more than 5,000 companies with optionable stocks, as well as several hundred more exchange traded funds (ETF) with listed options.
- If a stock is not optionable, it is more difficult to hedge positions in that stock, which makes it harder to mitigate the risks involved.
Understanding Optionable Stocks
An optionable stock is one that has options listed and tradable on a market exchange. Not all companies that trade publicly on stock markets have exchange traded options. This is due in part to certain minimum requirements that need to be met, such as a minimum share price and minimum amount of outstanding shares.
Currently, there are more than 5,000 companies with optionable stocks, as well as several hundred more exchange traded funds (ETF) with listed options. A stock being optionable allows investors to purchase options on the underlying stock, giving them the right to buy or sell shares of that underlying stock at a set price.
If a stock is not optionable, it is more difficult to hedge positions in that stock, which makes it harder to mitigate the risks involved. For stocks like these, an investor can arrange for an over-the-counter (OTC) options contract to be written with their broker-dealer. It is quite easy these days to look up online if a stock has listed options on it or not. The easiest way to check whether a stock is optionable is to go to the Chicago Board Options Exchange (CBOE) website and check whether there are options listed for a particular stock.
Minimum Criteria for an Optionable Stock
In order to have options listed for a stock, it must meet certain criteria. Under current CBOE rules, there are five primary criteria that a company must meet before options on its stock can be traded on the options exchange:
- The underlying equity security must be listed on a recognized exchange such as the NYSE, AMEX, or NASDAQ. It cannot trade over the counter, such as on the pink sheets or a bulletin board, like over-the-counter-bulletin-board (OTCBB).
- The closing price of the company's shares in the market must have a minimum per-share price for a majority of trading days during the three prior calendar months. The current minimum price is $3.00 per share for "covered securities" or $7.50 per share for non-covered securities.
- There must exist a minimum of 7,000,000 shares of the underlying security that are owned by persons other than those required to report their stock holdings under Section 16(a) of the Securities Exchange Act of 1934.
- The company must have at least 2,000 unique shareholders.
- The trading volume (in all markets in which the underlying security is traded) has been, on average, at least 2,400,000 shares in the preceding twelve months.
If a company does not meet any one of these criteria, options exchanges, like the CBOE, will not allow any options to be traded on the underlying security. Additionally, because of the second condition listed above, a company cannot have options traded on it until at least three months after its initial public offering (IPO) date.