Who creates stock options? Who creates the market for them? Why are these created (as insurance?)?

Question

Who creates stock options? Who creates the market for them? Why are these created (as insurance?)?

Answer 1

As far as creation is involved, there are three different types of stock options.

There are employee stock options. These are created by the company and issued to employees as an incentive for them to do their best to help the company do well.

There are OTC (over the counter) options between two parties. They are created by one party determining the terms of the contract and makng an offer to buy or sell the option, followed by the second party accepting the offer. Hence the market is created by the two parties plus a broker who helps the two parties find each other. These contracts can be created for either insurance or speculation.

The third, and most common, type of option is a listed option. The creation of one of these options is a three step process.

First, an exchange must decide to list options for the particular stock. To be eligible the stock must meet certain minimum requirements, such as market capitalization, number of different owners and liquidity. Once a company is eligible an exchange may list options for the company, but will only do so if there are market makers available who are willing to make a market for the options.

Second, after at least one exchange has decided to list options for the particualr stock, the option strike prices must be determined. The number of strike prices originally created depends upon the expected demand, but will always include an at the money strike, an in the money strike, and an out of the money strike. Individual investors who want an additional strike price listed may request a new strike price at any time.

At this point in time the option symbol has been created and the market makers have created bid and ask quotes for the options, but there are no contracts created yet.

A contract is created whenever a trade is made with both traders (the buyer and the seller) opening a position.

The option exchanges and the market makers create the market place for these options. The actual market is created by all the parties wanting to trade the options.

As for the reason options are created, it is because both parties believe they can make money, either with speculative profits or by mitigating losses. Options have been created for both purposes for at least 400 years, when tulip bulb mania included extensive option trading. See

http://www.stock-market-crash.net/tulip-...

if you are not familiar with the story of tulip bulb mania and you want to learn about it.

Answer 2

brokers will allow stock traders who have sufficient capital in their account and varying degrees of experience to 'write' call or put options....it's not just pros or banks who do it.....some like to write them on stocks that are not moving too much to benefit from 'time decay' on the premium......as the option gets close to expiring, it loses value simply for that reason, so the person who originally wrote it pockets that difference.......there are strategies whereby you can write an option contract and protect yourself from large moves and make a decent living off that alone.....

Answer 3

they do provide protection esp if you're holding large amounts of common stock....brokerage houses like Lehman, JPMorgan, (Bear Stearns used to) help make a market  but the CBOE (Chicago) provides the main market I believe