Option Contract Size vs Multiplier: Understanding the Differences
When trading options, it`s important to understand the differences between contract size and multiplier. These two terms are often used interchangeably, but they refer to different aspects of options trading. In this article, we`ll explain the differences between option contract size and multiplier and how they impact the trading process.
Option Contract Size
Option contract size refers to the number of underlying assets that the options contract represents. Most options contracts represent 100 shares of the underlying stock. For example, if you purchase one call option contract for XYZ Company, you would have the right to purchase 100 shares of XYZ Company at the strike price during the expiration period.
The option contract size is fixed and cannot be changed. If you want to purchase more shares, you would have to buy additional options contracts. Similarly, if you want to reduce your exposure, you would have to sell your existing options contracts.
The multiplier, on the other hand, refers to the amount of money that changes hands for every point that the underlying asset moves. The multiplier is determined by the exchange where the options are traded and may vary between different options contracts.
For example, if the multiplier for a particular options contract is 10, then for every point that the underlying asset moves, the option`s value will change by $10. So, if you purchased a call option contract for XYZ Company with a multiplier of 10 and the underlying stock increases by five points, the value of your option contract would increase by $50.
The multiplier can be used to calculate the overall value of an options contract. To do this, you would multiply the current price of the options contract by the multiplier. For example, if the current price of a call option contract is $2 and the multiplier is 10, the total value of the contract would be $200.
Which One Is More Important?
Both option contract size and multiplier are important factors to consider when trading options. Option contract size determines the number of underlying assets that the option represents and sets the maximum amount of exposure you can have in a particular trade. For example, if you want to purchase 500 shares of a particular stock, you would need to purchase five options contracts representing 100 shares each.
The multiplier, on the other hand, determines the amount of profit or loss that can be made in a trade based on the movement of the underlying asset. The multiplier is used to calculate the total value of the option contract and determines the amount of money that will change hands for every point that the underlying asset moves.
Understanding the differences between option contract size and multiplier is crucial to successful options trading. Option contract size determines the maximum amount of exposure that you can have in a particular trade, while the multiplier determines the amount of profit or loss that can be made based on the movement of the underlying asset.
As a professional, it`s important to ensure that articles on options trading are clear and easy to understand. By breaking down complex concepts like contract size and multiplier, traders of all levels can make more informed decisions and avoid costly mistakes.