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OPTION EXERCISE PRICE INTERVALS
Exercise prices are typically set at 2-1/2 point intervals for securities trading under $25 per share, 5 point intervals for securities trading above $25 per share and below $200 per share, and 10 point intervals for securities trading above $200. The exchange listing the option contract may, however, introduce exercise prices at different intervals in order to provide increased liquidity. The 2-1/2 point intervals enhance depth and liquidity in lower priced options by giving investors in those stocks available strict prices more near-the-money for hedging purposes.

HOW EXERCISE PRICES ARE DETERMINED

As option contracts expire, trading is introduced for a new expiration month, with the initial exercise prices normally bracketing the current stock price at the time the new expiration month contracts are introduced. For example, if XYZ stock were trading at 47-3/8 at the end of January, the option exchange would probably introduce the XYZ October 45's and 50's for both puts and calls.

New Oct Puts and Calls 45
XYZ Current Price 47.375
New Oct Puts and Calls 50

If the market price of the underlying security is at or very close to a standard exercise price, say 49-7/8, the exercise price that is closest to the market price as well as the two surrounding exercise prices might be selected.

New Oct Puts and Calls 45
XYZ Current Price 49.875
New Oct Puts and Calls 50
New Oct Puts and Calls 55

INTRODUCTION OF ADDITIONAL EXERCISE PRICES

As the price of the underlying security (or index) changes, the creation of additional series of options may become necessary. The new series created would reflect the price movements of the underlying security, and the additional series may be added to one or more of the expiration months for which options on that security are already being traded. New series of options are added when those options would have at least 45 days left before expiration. For example, if, in March, XYZ traded at 55, XYZ 60's would be added to the existing XYZ 45's, 50's and 55's already being traded for expiration months at least 45 days away.

In general, when the underlying security trades at or through an existing exercise price, a new series is brought out within a couple of days for each expiration month which has at least 45 days left until expiration.