If you’ve just started trading options you may have noticed that not all stocks have options available for trading. Options can be extremely risky products to trade. Options exchanges require stocks to meet certain requirements before a stock can have options contracts available for trading. These requirements are set by the exchanges and individual companies have no say in the matter. Let’s take a look at the requirements so we can understand this further.
Summary
- The CBOE sets the requirement criteria an individual stock must meet to have options
- If a company meets the CBOE options contracts requirement criteria they can have options available for trading
- The CBOE reserves the right to change the rules and remove options trading for securities
CBOE Options Contracts Requirements
The CBOE ( Chicago Board Options Exchange) sets forth the requirement criteria that individual equities must meet to have options available for trading [1]. Below are the 5 requirements a stock must meet to have options.
- The total trading volume in the past 12 months must be at least 2,400,000 shares
- Minimum of 7,000,000 publicly held shares
- The price of the stock must close at or above $3 per share in the last three days
- The stock must have a minimum of 2,000 shareholders
- The company must be registered with the NMS (National Market System)
If any of these requirements are not met, the CBOE will not allow options to be traded on the stock. The reason the requirements are strict is that options are risky products.
Recommended Reading: The History of Options Trading – How Options Trading Started
Minimum Trading Volume
For a stock to be eligible to have options it has to have traded a minimum of 2,400,000 shares in the past 12 months. A stock needs to be liquid enough to support options trading. If a stock has very low trading volume, it will result in a very illiquid options market.
Poor liquidity can result in wider bid-ask spreads for traders which makes for a very risky trading environment.
Minimum Publicly Held Shares
There are a minimum of 7,000,000 shares of the underlying security which are owned by persons other than those required to report their stock holdings. This requirement is in place to make sure that the stock is not too heavily controlled by one single person or entity. These requirements are monitored by the exchanges
Price Requirements (Covered Securities vs. Non-Covered)
According to the CBOE rule book, there are two separate definitions for the price requirements for stock options: covered securities and non-covered securities.
- Covered Securities
The Majority of U.S. stocks are considered covered securities. For covered securities, the market price per share of the underlying security needs to have been at least $3 per share for the past 3 consecutive business days. The market price of the underlying security is measured by the closing price reported in the market in which the security is traded.
- Non-Covered Securities
For non-covered securities, the pricing requirements are a bit different. These are usually securities traded on foreign exchanges or in other countries. For non-covered securities, the market price per share of the underlying security must be at least $7.50 for the majority of business days during the last 3 months from the date of selection. This is measured by the lowest closing price reported in the market in which the security trades.
Important: Exchanges have strict surveillance agreements in place with the primary exchanges in the country where the securities ADR (American Depository Receipts) is traded and measured.
Minimum Shareholder Requirement
The CBOE requires that there are at least 2,000 shareholders of the underlying security. If all other rules are met and this one is not, the stock will not be allowed to have options.
NMS Registration
For a company to be eligible to have options trading on its stock they have to be registered with the NMS. The NMS is the National Market System and they promote market transparency by regulating how exchanges disclose and execute stock and options trades. The NMS governs trading on all U.S. stock exchanges.
If all these requirements are met, a stock will be allowed to have options trading. If they happen to meet all the requirements and in the future, the stock fails any of the requirements, the exchange reserves the right to remove the options.
FAQ’s
Can stocks have options if they just had an IPO?
A company can’t have options on its stock until 5-trading days following its IPO date. This is standard practice for all IPOs.
Can you buy options on penny stocks?
You can’t buy options on penny stocks. The CBOE requires individual equities to have a minimum share price of $3 in the last 3 trading days for the stock to have options.
Related Reading
Benefits of Trading In the Money Call Options
Stock Options Expiration Date Explained
Iron Condor vs Iron Butterfly
Article Sources
[1] Rules of the CBOE Exchange – Options Requirement Criteria https://cdn.cboe.com/resources/regulation/rule_book/C1_Exchange_Rule_Book-Effective-October-7-2019.pdf
