What Is Optimal Capital Structure? The optimal capital structure of a firm is the best mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital. In theory, debt financing offers the lowest cost of capital due to its tax deductibility. However, too much debt increases the financial
Investopedia / Michela Buttignol What Is an Option? The term option refers to a financial instrument that is based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not
What Is Optionable Stock? An optionable stock is one where the shares have the necessary liquidity and volume such that an exchange lists that stock’s options for trading. In order for a stock to be optionable, exchanges mandate that certain criteria be met, including a minimum share price, number of shares outstanding, and minimum unique
What Is Option-Adjusted Spread (OAS)? The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option. Typically, an analyst uses Treasury yields for the risk-free rate. The spread is added to the fixed-income security
What Is an Options Chain? An options chain, also known as an option matrix, is a listing of all available options contracts for a given security. It shows all listed puts, calls, their expiration, strike prices, and volume and pricing information for a single underlying asset within a given maturity period. The chain will typically be
What Is an Options Disclosure Document (ODD)? The options disclosure document (ODD) is a publication issued by the Options Clearing Corporation (OCC) that serves as an important guide for options traders. The comprehensive document—formally titled Characteristics and Risks of Standardized Options—is particularly essential for novice options traders. Options are financial derivatives based on the value
What is Option Margin Option margin is the cash or securities an investor must deposit in their account as collateral before writing—or selling—options. Margin requirements are established by the Federal Reserve Board in Regulation T and vary based on the type of option. Key Takeaways Options margins are the cash or security that traders must submit
What Is an Option Premium? An option premium is the current market price of an option contract. It is thus the income received by the seller (writer) of an option contract to another party. In-the-money option premiums are composed of two factors: intrinsic and extrinsic value. Out-of-the-money options premiums consist solely of extrinsic value. For
What Is Option Pricing Theory? Option pricing theory estimates a value of an options contract by assigning a price, known as a premium, based on the calculated probability that the contract will finish in the money (ITM) at expiration. Essentially, option pricing theory provides an evaluation of an option’s fair value, which traders incorporate into
What Is Options Backdating? Options backdating is the process of granting an employee stock option (ESO) that is dated before its actual issuance. In this way, the exercise (strike) price of the granted option can be set at a lower price than that of the company’s stock price at the granting date. This process makes
