How to use the multiplier with options
multiplier option contract

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When you buy your first contract in options, you will have to deal with the multiplier.

We almost exclusively use American options. In American options, the multiplier is always 100.

 

A multiplier of 100 means that each option contract controls 100 actions.

Suppose we purchase a Google call option, I will be entitled to buy 100 Google shares.

 

If an option costs $ 5, its value will be $ 500.

We bought an option for $ 5 and its price went up 10% and worth $ 5.50, I will have earned $ 50.

 

It is very important to always check the multiplier when you are not buying American stocks.

In European markets, there are many different multipliers. It is possible to find some differences even when working with commodities or indices.

 

Buy Options or Stocks?

When we find ourselves buying options it is easy to compare the transaction with the purchase of the underlying shares.

Buying 100 Apple shares or buying 1 Apple call option would seem to be the same thing.

 

In reality, many things change, first of all, the margin. In this article, the Delta will not be taken into consideration so as not to complicate the reasoning too much.

As we know, the margin required to maintain an overnight equity position in the US market is very high.

 

If instead, we go overnight with a certain strategy in options the required margin will be insignificant.

If we purchase a call the required margin will be equal to the premium paid.

 

By directly purchasing the 100 shares margin will be much higher.

If, on the other hand, we sell an option naked, a very high margin similar to that required to maintain a position with shares will be required.

 

The multiplier is, therefore, a very important reference point, especially when entering to protect a position in shares.

Suppose you have 300 Microsoft shares in your portfolio purchased at $ 140 for a value of € 42,000.

If we needed to cover this transaction with a sale of options of the same amount we should go to sell 3 option contracts.

 

 

 

 

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My name is Luca. I grew up in Italy. I have a degree in law and I’m an independent trader since 2007. I’m a systematic trader and sometimes, I trade using options strategies with US ETFs and Stocks.I have built hundreds of automated trading systems and indicators for TradeStation, MultiCharts and MetaTrader.I started this blog in 2017 to share what I learned in the financial market.

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