In options trading, the term ‘contract size’ refers to the total number of underlying assets represented by a single options contract. The typical standardized contract size for one equity options contract is 100 shares of the underlying stock. For example, if a trader purchases a call option, this gives them the right (not the obligation) to buy 100 shares of the underlying stock at the agreed strike price, up until the contract’s expiration date.
However, contract size isn’t the same for all types of options contracts. In index options, for example, instead of representing a certain number of shares, the contract size is determined by a multiplier that is applied to the price of the index.
It is crucial for traders to be aware of the contract size in options trading. It not only helps to calculate the actual cost of the options trade (premium multiplied by the contract size) but also determines exposure to the underlying asset and affects the potential profit or loss. Therefore, this information plays a crucial part in strategic trading decisions.
