U.S. Equity Option Markets 101

What is an equity option?

An option is a contract to buy or sell a specific financial product. This product is known as the option's underlying instrument. For equity options, the underlying instrument is a stock, exchange traded fund (ETF) or similar product. An equity option is a contract which conveys to its owner the right, but not the obligation, to buy or sell shares of the underlying at a specified price on or before a given date. After this date, the option ceases to exist. The seller of an option is, in turn, obligated to sell (or buy) the shares to (or from) the buyer of the option at the specified price upon the buyer's request. Like trading in stocks, option trading is regulated by the Securities and Exchange Commission (SEC).

What is an equity option exchange?

An equity option exchange is a marketplace where participants meet to buy and sell listed options. Equity options exchanges create and list the option contracts which are traded. Equity options are created covering a range of prices and expirations according to standardized listing programs. An equity option exchange provides a neutral location for investors to come together to execute trades. Listed equity options can only transact on an equity option exchange. Today, there are multiple equity option exchanges, all of which facilitate the matching of buyers and sellers in order to execute trades.

Who are the customers of an equity option exchange?

Exchange customers are registered broker-dealers. Individual investors and institutions, such as mutual fund companies, do not connect directly to exchanges, but rather trade through their brokers, who connect to the Bats Options exchange and other exchanges to execute trades.