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This is a level 1 question.
I am really confused by the large number of different option quotes for a single stock. For example, according to the symbol rules, the Yahoo! (YHOO) option root should be YHQ. But in fact, there are so many different roots. What is the difference between them? Which one is the most active?
Many stocks have more than one option root. YHOO is one of the more dramatic examples with several option roots including YHQ, YHV, VYH and WYH. There are several reasons why multiple roots appear:
- When a stock splits, all options that existed prior to the split are adjusted for the split and often change option root. All new options traded on that stock are opened under the former option root or roots.
- When the company has a spin-off, there will usually be a pre- and post-event option root to reflect the value change in the underlying shares.
- When the company buys or merges with another company, one of their option roots will be "transferred" over to the other company. For example, if company ABC buys company XYZ, both option roots will now be attributed to company ABC. This is because the prices of the options in both option classes are now dictated by the price of underlying company ABC.
- When the company price changes dramatically in a short period of time, new option roots will have to be created to keep up with the change. For example, if company ABC has an option ABCAJ (the January 50 strike) and then appreciates in price to the point where there is demand for the January 150 strike, the ABCAJ symbol is already taken. Therefore, a new option root would be created to allow for the new option. ABQAJ would be a possible new symbol.
In any event, the different option roots refer to different expiration dates, strike levels, or contract sizes. To the average investor, this is mostly just an accounting issue. The net value of options positions never changes in any of these examples (unless the stock price of the underlying security changes). The important thing for you to know is the strike price and expiration date of your option. Ask your broker about the proper symbol.
As to which option root is the most active, there is no root that is designated to be more active than any other. The situations dictating new roots as discussed above do not relate to activity, but rather to special situations. In general, front-month options that are near the money will see the most trading activity, regardless of the basis for their particular option root.
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Question Level Key
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Level Two--Introductory Points, Practical Points and Simple Strategies
Level Three--More Advanced Strategies and Repairs
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Level Five--High end questions concerning Portfolio Analysis, Managing a Portfolio
of Options, Option Pricing Models, and Nuances of Trading. Included could be a variety of
other topics.
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