Option by quantity
Contract size is the deliverable quantity of a stock, commodity, or other financial instrument that underlies a futures or options contract. It is a standardized amount that tells buyers and sellers exact quantities that are being bought or sold, based on the terms of the contract.
The size of the contract varies depending on the commodity or instrument. It also determines the dollar value of a unit move in the underlying commodity or instrument. In an OTC transaction, the buy or sell occurs between two institutions directly and not on a regulated exchange.
Commodities and financial instruments can also be traded on a regulated exchange. Standardizing contracts reduces costs and improves trading efficiencies.
Specifying contract size is an important part of this process. For example, the contract size of a stock or equity option contract is standardized at shares.
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This means that, if an investor exercises a call option to buy the stock, they entitled to buy shares per option contract at the strike price, through the expiration.
An owner of option by quantity put option, on the other hand, can sell shares per one contract held, if they decide to exercise their put option.
Contract sizes for commodities and other investments, such as currencies and interest rate futurescan vary widely. The Pros and Cons of Contract Size The fact that contracts are option by quantity to specify contract size is both good and bad.
One advantage is that the traders are clear about their obligations. For instance, if a farmer sells three soybean contracts, it is understood that delivery involves 15, bushels 2 x 5, bushelswhich will be paid in option pricing exact dollar amount that is specified by the contact size.
A disadvantage of the standardized contract is that it is not amendable. The contract size cannot be modified.
So if a food producer needs 7, bushels of soybeans, their choice is to either buy one contract for 5, leaving 2, short or buy two contracts for 10, bushels leaving a surplus of 3, It is not possible to modify the contract size as in the over-the-counter market.
In the OTC market, the amount of product being traded is much more flexible because the contracts, including size, are not standardized. Compare Accounts.