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How Options Trade

Options contracts are traded a lot like stocks.

To buy or sell options, you will need to place an order through a broker, who will execute it either on the over-the-counter (OTC) market or on an exchange. As with stocks, you may choose to work with a full-service broker, who offers research and advice along with trade execution services, or with a discount or deep-discount broker, who provides fewer extras and tends to charge lower commissions.

In both exchange and OTC markets, there are two kinds of traders. Brokers are simply agents who execute trades on behalf of their customers. Dealers, on the other hand, buy and sell specific options and trade on behalf of their own accounts. When a broker wishes to buy or sell an options contract, he or she contacts a dealer to do so. As with stocks, OTC trades are negotiated individually between brokers and dealers, while trades on an exchange floor are conducted through open outcry auctioning.

There are generally four expiration dates available for any given security and strike price.

Options contracts have standardized expiration dates. There are generally four expiration dates available for any given security and strike price. For example, on the Chicago Board of Options Exchange (CBOE), available expirations include two near-term months and two far-term months, with the expiration date on the third Saturday of the month. Options contracts issued in January, for instance, might expire in January, February, April, and July. Expirations follow a sequential cycle of months through the year. The last day on which an option can be traded is on the last business day before the expiration date—typically the Friday before the third Saturday of the month.