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Here is some great information on the type of non-standardized options are likely to be tested on your series 7 exam. Test takers should understand the operational aspects and the uses of mini options, weekly options and binary options.
Mini options
The options exchanges have begun offering option contracts that allow an investor to speculate or to hedge a position in a high priced security that is less than 100 shares. With many stocks trading well into the triple digits, individual investors often can only afford to purchase a small number of shares (also known as an odd lot). These investors who wish to hedge a small position would not be able to effectively do so with a standard option contract covering 100 shares. Mini options cover 10 shares of the underlying security. To determine the total premium an investor would pay or receive, you must multiply the premium by the 10 shares covered under the contact rather than 100 shares for a standard option contact. Mini stock options are American style exercise and the exercise of mini stock options will result in the delivery of the underlying shares. Options also trade on the mini S & P 500. The mini S & P 500 contract has a value equal to 1/10 of the value of the S & P 500 contract. For example, if the S & P 500 was trading at 1,950 the mini contract would be trading at 195. Options on the mini S & P use a multiplier of 100. Options on the mini S & P are European exercise and can only be exercised at expiration. The exercise of options on the mini S & P result in the delivery of cash. Weekly Options The CBOE has introduced weekly options designed to provide investors with the ability to speculate on the direction of a stock or index based on the release of pending news such as an earnings release or an announcement from the Federal Reserve board relating to an interest rate decision. Weekly options will also allow investors who are long or short to hedge their positions for only the period of time that includes the pending news release. As such the investor will be able to buy the hedge at a much lower premium due to the extremely short time frame of the option. Weekly options are listed on Thursday and expire the following Friday. New weekly options are listed each week however no new weekly options are listed that would expire during the expiration week for standard options (the third Friday of each month)
Binary Options
Binary Options are a way to speculate on the price of an underlying index based on your opinion of where a market will be in a certain period of time. Binary options are contracts that, at expiration, pay out a pre-determined, fixed amount or nothing at all. The payout amount for CBOE binary options is $100 per contract. Binary options are based on an underlying security, have various strike prices as well as various expiration dates. The CBOE lists both call and put binary options. If, at expiration, the price of the underlying security closes at or above the selected strike price, the buyer of a binary call option receives $100 per contract. If the underlying security closes at a price that is below the strike price on the expiration date, the buyer receives nothing. In the case of binary put options, the put buyer receives $100 per contract if the underlying security closes below the strike price at expiration, and nothing if the underlying security closes at or above the strike price at expiration. As with traditional options, a binary option position may be liquidated (bought or sold to close) prior to expiration. The price of a binary option usually reflects the perceived probability that the underlying security price will reach or exceed (for binary call options) or fail to reach or exceed (for binary put options) the selected strike price at expiration. The cost of CBOE binary options will normally be quoted at a price between zero and $1 (which equates to $1 to $100 per contract). Buyers of binary options pay for the contract at the time of purchase.
Good luck on your series 7 exam
The Securities Institute of America
