U.S. Equity Options Contract Specifications: An In-Depth Analysis of the Standard 100-Share Contract

When you first start trading US stock options, you may find option quotes confusing: Why does the option show a price of $2, but the actual amount you need to pay is $200? The answer lies in the standardization of options contracts. US stock options use a standardized contract system in which each contract represents 100 shares of the underlying stock. This “100-share standard” is fundamental to understanding options trading. Whether you want to use options for hedging risks or to leverage returns, understanding option contract specifications is the essential first step toward success.

What is an Options Contract

An options contract is a type of financial derivative that grants the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified period. Unlike buying or selling stocks directly, options trading is about buying and selling “rights.”

Basic Definition of an Options Contract

An options contract is a standardized financial contract traded on an exchange. The key terms include the underlying asset, contract size, strike price, expiration date, and exercise style. The buyer acquires the right by paying the premium, while the seller assumes the corresponding obligation and receives the option premium as compensation.

Two Main Types of Options Contracts

Options contracts fall into two main categories:

Call Options: Give the holder the right to buy the underlying stock at a predetermined (strike) price. If you expect the stock price to rise, you can buy a call option to lock in a future purchase price.

Put Options: Give the holder the right to sell the underlying stock at a predetermined (strike) price. If you expect the stock price to fall, you can buy a put option to secure a minimum selling price regardless of price drops.

The 100-Share Standard for US Stock Options

The US options market employs highly standardized contracts, where “each contract represents 100 shares” is a core specification. This design not only streamlines the trading process but also provides foundational liquidity to the market.

Origin of the Standard Contract Size

Since the early days of the US options market, 100 shares was established as the standard contract unit for several reasons. First, 100 shares matches the US convention of trading stocks in “round lots,” making it easy for investors to understand and calculate. Second, this size strikes a balance between flexibility and liquidity, avoiding contracts too large for small investors and costs too high if contracts are too small.

The Calculation Logic Behind the 100-Share Standard

Understanding the calculation logic of the 100-share standard is vital for accurately grasping trading costs. When you see an option quote on a trading platform, the displayed price is the premium per share, not the total contract price.

For example, if a tech company’s call option is quoted at $3.50, this means:

• Option premium per share = $3.50
• Shares per contract = 100 shares
• Total amount paid = $3.50 × 100 = $350

So if you buy 1 contract of this option, you need to pay $350 for the premium. If you buy 5 contracts, you pay $1,750 ($350 × 5).

Contract Adjustments in Special Circumstances

Although 100 shares is the standard, contract specifications may be adjusted after certain corporate actions. These include:

Stock Split: When a company splits its stock, options contracts are adjusted accordingly. For instance, after a 1-for-2 stock split, your original 1 contract for 100 shares may become 2 contracts for 100 shares each, or 1 contract for 200 shares. The total value remains unchanged.

Reverse Split: Unlike a stock split, a reverse split reduces the number of shares outstanding. For example, after a 10-for-1 reverse split, a contract might represent only 10 shares, turning into a non-standard contract.

Special Dividends or Spin-Offs: When a company pays a special dividend or spins off assets, contract size and strike price may be adjusted to protect the rights of option holders.

Important Note: Option contracts adjusted after corporate actions are marked as "non-standard contracts." These usually have lower liquidity and wider bid-ask spreads, so investors need to be especially careful.

Key Elements of an Option Contract

Beyond the 100-share standard, option contracts include several other important elements that together determine options’ value and trading features.

Underlying Asset and Contract Code Identification

Each option contract is based on a specific underlying asset, which may be an individual stock, ETF, or stock index. Option codes contain several key pieces of information:

For example, “XXXX 251226C00150000” means:

• XXXX = underlying stock symbol
• 251226 = expiration date (December 26, 2025)
• C = Call option (P for put option)
• 00150000 = strike price of $150.00

The Significance of the Strike Price

The strike price is the agreed-upon price at which the transaction can occur as specified in the option contract. For a call, this is the price at which the holder can buy the stock; for a put, it’s the price at which the stock can be sold.

The choice of strike price directly affects the value of the option:

• In-the-Money (ITM): For calls, the strike price is lower than the market price; for puts, higher than the market price. These options have intrinsic value.
• Out-of-the-Money (OTM): For calls, the strike price is above market, for puts, below market. These options have no intrinsic value, only time value.
• At-the-Money (ATM): The strike price is approximately equal to the current market price.

Expiration Date and Time Value

US options have a clearly defined expiration date, which varies by type:

Standard Monthly Options: Usually expire on the third Friday of each month; the most common, with high liquidity.

End-of-Day Options: Expire daily, providing ultra-short-term trading flexibility.

Weekly Options: Expire every Friday, suiting short-term traders.

Quarterly Options: Expire on the third Friday of the last month of each quarter.

Time value decays as expiration approaches; this is known as "time decay." Unexercised options become worthless after the close on expiration day, so investors must pay close attention to deadlines.

Composition of the Option Premium

The option premium is the price of an option and consists of two parts:

Intrinsic Value: The profit that could be realized if exercised immediately. Only ITM options have intrinsic value; OTM options have none.

Time Value: Reflects the potential for the underlying asset price to move favorably before expiration. Time value is influenced by factors such as time remaining, volatility, and interest rates.

The formula is:

Premium = Intrinsic Value + Time Value

Due to the 100-share standard, the total cost you pay equals the per-share premium times 100.

Differences in Exercise Style

US options are mainly American style, which differs from European options:

American Options: Can be exercised on any trading day up to and including expiration. Nearly all US equity and ETF options are American style.

European Options: May only be exercised on expiration day. Some index options use European style.

Although American options offer more flexibility, most investors close their positions before expiration to retain remaining time value instead of exercising early.

Practical Applications of the 100-Share Standard

Once you understand the 100-share standard, let’s see how to apply it to actual trading calculations and decisions.

Example: Calculating Option Premiums

Let's look at some concrete examples:

Example 1 – Buying a Call Option

Suppose a stock is currently $250. You're bullish for the next month and decide to buy a call with a $260 strike, expiring in one month, quoted at $5.20.

• Premium per contract = $5.20 × 100 = $520
• Buying 3 contracts costs $520 × 3 = $1,560

If, at expiration, the stock rises to $280, each contract has intrinsic value of $20 ($280 - $260), so 3 contracts have a value of $6,000 ($20 × 100 × 3). Subtracting the $1,560 cost, your profit is $4,440.

Example 2 – Selling a Put Option

Suppose a stock is $420. You believe it won't drop below $400, so you sell a $400-strike put, quoted at $3.80.

• Selling 1 contract earns you $3.80 × 100 = $380

If the stock remains above $400 at expiry, the put expires worthless and you keep the full $380.

These examples are for illustration only and not investment advice.

Calculating Profits and Losses

Option trading profit/loss calculations must account for the 100-share multiplier:

Call Buyer P&L:

• Maximum loss = Total premium paid (option price × 100 × contracts)
• Breakeven = Strike price + premium per share
• Potential profit = (Stock price − strike price − premium per share) × 100 × contracts

Put Buyer P&L:

• Maximum loss = Total premium paid
• Breakeven = Strike price − premium per share
• Potential profit = (Strike price − stock price − premium per share) × 100 × contracts

Understanding the Leverage Effect

The 100-share standard creates leverage in options. Using the previous example:

Buying 100 shares directly costs $25,000 ($250 × 100), but buying 1 call option costs only $520, letting you control the same exposure for about 2% of the capital.

If the stock rises from $250 to $280—a 12% gain:

• Stock profit: $3,000 ($30 × 100)
• Option profit: $1,480 ($20 × 100 − $520 premium)

Although the absolute gain with the option is lower, the return on investment is 285% ($1,480 ÷ $520), far exceeding the stock's 12%.

These examples are for illustration only and not investment advice.

Risk Notice: Leverage is double-edged: if the market turns against you, you could lose the entire option premium, whereas holding stock results in only a paper loss. Investors must fully understand the risks.

Exercise and Settlement Process

When an option holder exercises, the 100-share standard determines settlement quantities:

Exercising a Call:
The holder pays “strike price × 100” and receives 100 shares. For a $150-strike call, you pay $15,000 to get 100 shares.

Exercising a Put:
The holder delivers 100 shares and receives “strike price × 100” in cash.

In practice, most investors close positions before expiration to avoid large cash flows and the complexity of stock settlement.

Risk Management Applications of Options Contract Specifications

Understanding contract specifications is crucial not only for trading but also for risk management.

Hedging Stock Positions

Suppose you own 500 shares of a stock at $180 ($90,000 total). You're concerned about a short-term drop but don’t want to sell. You can buy puts for protection:

Buy 5 $175-strike puts (5 × 100 = 500 shares), at a $2.50 premium, totaling $1,250.

If the stock falls to $160, your holding loses $10,000 ($20 × 500), but each put is worth at least $1,500 (($175−$160) × 100), so 5 contracts are worth $7,500. After the $1,250 cost, your put profit is $6,250, reducing total loss to just $3,750.

These examples are for illustration only and not investment advice.

Efficient Use of Capital

The 100-share standard allows options to boost capital efficiency. Rather than buying stock, you invest only a fraction in option premiums, freeing up funds for other allocations or as risk reserves.

Flexible Strategy Combinations

With the 100-share standard, investors can build a variety of strategies as needed:

Protective Put: Own 100 shares + buy 1 put, limiting downside risk.

Covered Call: Own 100 shares + sell 1 call, collecting premium to increase returns.

Straddle: Buy both a call and put with the same strike and expiration to profit from big moves.

All these strategies are based on understanding that each contract represents 100 shares.

Trading Cost Considerations

You need to consider certain costs when trading options:

Commission Fees: Usually charged per contract—check your broker’s schedule.

Bid-Ask Spread: Options markets are less liquid than stocks. OTM and near-expiry options have wider spreads.

Platform Fees: Some market data services require subscriptions, but many platforms provide basic data for free.

Understanding these costs is vital for calculating actual profit/loss, since the 100-share multiplier amplifies expenses.

Frequently Asked Questions

Why Are US Stock Options 100 Shares Per Contract, Not Another Amount?

100 shares per US options contract is a market convention formed over many years. It matches the traditional “round lot” size for stocks in the US, making calculations easy for investors. This size balances flexibility and liquidity, avoiding contracts that are either too big for smaller investors or too small and costly to administer. This standardization fosters market liquidity and efficiency.

Is Every Options Contract Always for 100 Shares?

In most cases, each US stock option contract represents 100 shares. However, after corporate actions like splits, reverse splits, special dividends, or spin-offs, contract size may be adjusted. Such adjusted contracts are called “non-standard contracts” and have special codes. Due to lower liquidity, they often have wider bid-ask spreads; investors should be cautious and prioritize standard 100-share contracts.

Can Small Investors Buy Options for Less Than 100 Shares?

The smallest tradable US options unit is 1 contract, representing 100 shares, and contracts cannot be split. So even with limited funds, investors must buy full contracts. While “mini options” (for 10 shares) once existed, they fell out of favor due to low liquidity and are now rarely traded. For small investors, consider low-premium options or options on lower-priced stocks to reduce the capital per contract.

How Do You Calculate the Actual Cost of Buying an Option?

To find the actual cost: option price × 100 shares × number of contracts. For example, a $4.50 quoted option purchased in 2 contracts costs $4.50 × 100 × 2 = $900. Add commissions and other trading fees. Option prices usually appear as decimals—always remember the 100 multiplier to avoid miscalculating your investment. The same logic applies when selling options to receive a premium.

Are Options Automatically Exercised at Expiration?

At expiration, whether options are automatically exercised depends on whether the option is ITM and your broker's policy. Most brokers auto-exercise ITM options—this is called “automatic exercise.” For example, a call with a $100 strike and the stock at $110 will typically be exercised. However, auto-exercise requires enough cash or stock in your account; otherwise your position may be closed. OTM options expire worthless. It’s best to manage positions actively before expiration, rather than rely on auto-exercise. Some brokers send reminders near expiration to help manage your positions.

Do Company Dividends Affect Option Contracts?

Ordinary scheduled cash dividends don’t trigger contract adjustments, but do affect theoretical option value: since share prices typically fall by the dividend amount on the ex-dividend date, call option value may drop and put value may rise. This expectation is factored into option prices ahead of the ex-dividend date. However, if a company pays a special dividend (generally more than 10% of share price), the Options Clearing Corporation may adjust the contract's strike price and size to protect holders’ rights, making the contract non-standard. Option holders should track dividend arrangements, especially special dividend announcements, to assess potential impacts.

Which tool you choose depends on your investment goals, risk tolerance, market perspective, and experience. Whatever you choose, you must thoroughly understand its mechanics, risks, and rules, and have a sound risk management plan in place. For more on investing, visit Longbridge Academy or download the Longbridge App.