High profile IPO’s over the past 12-months has generated significant demand for options on new stocks. Many investors have been surprised by criteria used by option exchanges to determine if they will list options on new stocks. Each exchange has their own criteria for listing options, but they all follow a number of basic rules prior to anointing a stock option eligible.
For an option to be considered eligible by an option exchange it must have a minimum of 7 million shares of float that are not restricted and freely tradable. Restricted shares could be shares owned by employees or insiders which are locked up for a certain period of time.
The float is the shares held by the public that are available to exchange hands. A second criteria needed to make a stock options eligible is that the company most have a minimum of 2,000 individual shareholders. If a company and the owner of the company own shares in a stock along with subs of the company, the stock would not meet the stated criteria.
A third criterion for options eligibility is that the stock must list and trade above $3 per share for five consecutive trading days. This means that Initial Public Offering shares cannot have listed options traded on them until 5 days after the IPO date. The average daily volume of the shares must be above 200,000. A fourth criterion is that the stock trade on a U.S. national market such as the NYSE or NASDAQ.
Once a stock meets these guidelines, it can be labelled options eligible. An exchange such as the Chicago Board of Options will then make a prudent business decision to determine if the stock should receive further approvals for listing or they will watch the movements of the underlying stock until the believe it is suitable for trade.
Stocks such as Facebook and Twitter which received media notice because of their global popularity easily receive options eligibility quickly but there are a number of lower profile companies that have a difficult time generating the trading volume needed to become options eligible.
Currently the Options Clearing Corp and numerous options exchange are sponsors of the Options Listing Procedures Plan, a national market system plan, which describes procedures used for selecting specified stocks for listing purposes. If the SEC approves the plan, a more cohesive guideline will be presented to investors on how exchanges make their business decision as well as the criteria that will be used to formalize their decision.