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Why the Industry Is Changing Options Symbology

The options industry has outgrown five-character options symbols and is converting to a more-descriptive format that will help investors understand the instruments they are trading.

Read the related feature: Options Symbology Deadline Looms

Industry executives agree that the current options symbology is cryptic. Options symbols don't bear any resemblance to the underlying stock and require investors to be conversant in options-speak -- for example, which letters stand for which expiration month.

"Over time the listed options moved from plain vanilla to Baskin-Robbins," says James Leman, advisory committee member at management consultancy Westwater Corp., describing how firms had to bend and twist the old OPRA codes to accommodate an explosion of new options "flavors." As the industry adopted long-dated options and Long-term Equity AnticiPation Securities (LEAPs), the contract expiration dates went beyond traditional timeframes, he says. "Each brokerage firm needed to customize the characters to represent the range of options that needed to be followed in the market and to put them on their books and records to represent it in customer statements," Leman explains.

The Options Symbology Initiative (OSI) aims to help investors better understand the instruments they're trading. For example, today Microsoft contracts are represented by "MSQ AB," "MSB AB" and "MSD AC," notes Navin Surana, director and senior project manager at Westwater. The last two digits specify the expiration month and strike price. On Feb. 12, however, the first three characters, known as the root symbol, will remain, but the last two characters -- the OPRA codes -- will disappear, to be replaced by more intuitive identifiers.

Then, starting in March, firms will begin to phase in new root symbols to bring them closer to the underlying stock symbol. "MSQ" and "MSB," for instance, will become "MSFT." "Ninety-nine percent of the time it will become 'MSFT,' " Surana says, noting, "There could be times that it would become 'MSFT1' or 'MSFT2' because of nonstandard corporate actions." This process is scheduled to be completed by May 2010.

"The new, more descriptive symbols are a good idea," optionsXpress CEO David Fisher says, pointing out that the industry has been using a system that was devised in the 1970s. "The number of options have exploded, as have the number of expiration months and number of different strikes."

He adds, "The same company's options have wildly different options symbols depending on which month or strike price you are looking at." And because there are only so many symbols that can be created with five characters, Fisher continues, they are recycled after they expire, adding to the confusion.

The new system is designed to offer more-meaningful identifiers. "That's the good news," comments Fisher, who says each option will now have a unique, rational symbol. Brokers are trying to create symbols in plain English so people can understand them. With 21 characters to utilize, the new symbology can identify the underlying ticker symbol, the month and year that the contract expires, whether it's a put or a call, and whether it's a standard option on 100 shares or an adjusted option, according to Fisher.

Tom simplify things further, optionsXpress and other brokers are creating drop-down menus to help investors navigate the many available options types, Fisher reports. "It's going to be much easier for investors, who won't need to type in a 20-character symbol," he says.

While the options symbology conversion will require some work on the part of brokers, Fisher acknowledges, the change is going to have a positive impact for investors, he contends.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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