Although this level of knowledge is assumed, a brief review of equity option basics is in order:

■ An equity option is a contract which conveys to its holder the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) shares of the underlying security at a specified price (the strike price) on or before a given date (expiration day). After this given date, the option ceases to exist.The seller of an option is, in turn, obligated to sell (in the case a call) or buy (in the case of a put) the shares to (or from) the buyer of the option at the specified price upon the buyer’s request.

■ Equity option contracts usually represent 100 shares of the underlying stock.

■ Strike prices (or exercise prices) are the stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.The

strike price, a fixed specification of an option contract, should not be confused with the premium, the price at which the contract trades, which fluctuates daily.

■ Equity option strike prices are listed in increments of 1, 21/2, 5, or 10 points, depending on their price level.

■ Adjustments to an equity option contract’s size and/ or strike price may be made to account for stock splits, mergers or other corporate actions.

■ Generally, at any given time a particular equity option can be bought with one of four expiration dates.

■ Equity option holders do not enjoy the rights due stockholders – e.g., voting rights, regular cash or special dividends, etc. A call holder must exercise the option and take ownership of underlying shares to be eligible

for these rights.

■ Buyers and sellers in the exchange markets, where all trading is conducted in the competitive manner of an auction market, set option prices.