Because of the extra risk of options, certain requirements must be met for a stock to be traded under this type of contract. In fact, businesses get no say over whether their stocks appear on consolidated screening lists as an options exchange or not. While this is at the exchange’s discretion, it is still important to understand a little about the requirements that must be met for these stocks to be listed as options.
According to the Securities and Exchange Commission, options have not always been around. Even though they have existed since the 1970s, they did not actually become popular until the start of the 21st century. The first options exchange company opened in 1973. On its first day, it would only sign 900 contracts and exchange 16 stocks. However, this would soon grow with billions of stocks trading hands through options by the early 2000s.
This extreme growth is what spurred the necessity of requirements. Investors have discovered that options are a great way to increase their returns and cost-effectively minimize risks. So while the number of options is still growing, the leading options exchange company established requirements to keep them under control.
The Five Requirements
To stop this extreme growth, five basic requirements were established for a stock to be listed, including proper registration with NMS, 7,000,000 shares, 2,000 shareholders, a trading volume of 2,400,000 in the past year, and a price that meets the requirements. If a stock fails to meet just one criterion, it cannot be traded as an option.
Price requirements are the most important. For instance, low-priced stocks already have a bad reputation, which exchange companies can worsen by listing them as an option. Additionally, stock splits can create more shares which could get around the other requirements for options stocks.
Because of the necessity, these requirements are the most complex. In addition, price rules will change and evolve to stay in line with the demands of investors and the current popular options trading strategy. That said, low-priced stocks will generally be excluded from options exchanges because of their bad reputation. Therefore, there is a minimum price requirement depending on the type of stock.
Personal Risk Requirement
While these may seem like a high and mighty option, they may not meet your personal risk requirements. This is because they have a reputation of being more dangerous than regular stocks. However, they are actually significantly less risky to investors when used properly. This is because the initial financial investment is lower. Plus, they are more dependable than other types of stocks. This means investors can implement thorough strategies to use options to raise their returns and minimize risk.
If you’ve heard about options exchanges, you’ve probably heard about their accompanying requirements. These are necessary because they keep the number of stocks traded as options limited. There are several different types of requirements. Knowing these can help you understand exactly what is needed for a stock to trade as an option.