Articles and Updates
December 2024
The Reason Certain Options Trade in Penny Increments
Every listed option has a minimum permitted trading increment. However, due to a program that started several years ago as an experiment and is now a permanent feature of the market, this increment can be as low as 1 penny.
In 2007, the Securities and Exchange Commission (SEC) authorized a six-month test called the Penny Pilot Program. This program applied to 13 classes of options, allowing them to be quoted and traded in penny increments to assess whether the reduced tick size would benefit investors.
The pilot program involved dropping the quote tick increment from 5 cents, the minimum required by exchanges at that time, for options series that were $3 per contract or greater to 1 cent for options series priced below $3 per contract. To be included in the initial program, certain criteria were considered:
Ultimately, a few years and a number of extensions later, the pilot had grown to include 363 option classes. And in 2020, it became a permanent program known as the Penny Interval Program, or Penny Program.
The table below details the current option tick minimums and how they are applied:
Toward the end of every year, the exchanges perform a review of the Penny Program using OCC’s National Cleared Volume data. The review covers the period from June 1 through Nov. 30 and ranks all multiply listed options to determine if updates are needed to the program.
The process is used to identify the 300 most actively traded multiply listed option classes whose underlying security is priced below $200, or any underlying index at an index level below $200. If any options meet the required specifications but are not currently in the program, they are added to the program on the first trading day of January and their tick minimum lowered
A stock can also be removed from the Penny Program if during the annual review process the stock is no longer among the top 425 most actively traded options classes. As this can be confusing, it's important to note this approach is used for the removal of stocks from the program, in contrast to the process used for inclusion into the program. When removed, the tick increment is adjusted upward to the exchange minimum requirement of 5 cents.
Additionally, option classes can be added or removed outside of the annual review, such as when there is enough trading activity.
Overall, the Penny Program has been viewed as beneficial for the industry. By enabling tighter bid-ask spreads for certain options, it has created more opportunities to trade at better prices, ultimately enhancing market efficiency and improving the trading experience for participants.
For further information, see:
In 2007, the Securities and Exchange Commission (SEC) authorized a six-month test called the Penny Pilot Program. This program applied to 13 classes of options, allowing them to be quoted and traded in penny increments to assess whether the reduced tick size would benefit investors.
The pilot program involved dropping the quote tick increment from 5 cents, the minimum required by exchanges at that time, for options series that were $3 per contract or greater to 1 cent for options series priced below $3 per contract. To be included in the initial program, certain criteria were considered:
- Options had to be listed on multiple exchanges (known as multiply listed options)
- Only standardized options were included
- Options had to be actively traded and meet a minimum volume threshold
- The underlying price of security had to be below $200
Ultimately, a few years and a number of extensions later, the pilot had grown to include 363 option classes. And in 2020, it became a permanent program known as the Penny Interval Program, or Penny Program.
Minimum Increments
The table below details the current option tick minimums and how they are applied:
Penny Program Reviews
Toward the end of every year, the exchanges perform a review of the Penny Program using OCC’s National Cleared Volume data. The review covers the period from June 1 through Nov. 30 and ranks all multiply listed options to determine if updates are needed to the program. The process is used to identify the 300 most actively traded multiply listed option classes whose underlying security is priced below $200, or any underlying index at an index level below $200. If any options meet the required specifications but are not currently in the program, they are added to the program on the first trading day of January and their tick minimum lowered
A stock can also be removed from the Penny Program if during the annual review process the stock is no longer among the top 425 most actively traded options classes. As this can be confusing, it's important to note this approach is used for the removal of stocks from the program, in contrast to the process used for inclusion into the program. When removed, the tick increment is adjusted upward to the exchange minimum requirement of 5 cents.
Additionally, option classes can be added or removed outside of the annual review, such as when there is enough trading activity.
Overall, the Penny Program has been viewed as beneficial for the industry. By enabling tighter bid-ask spreads for certain options, it has created more opportunities to trade at better prices, ultimately enhancing market efficiency and improving the trading experience for participants.
For further information, see: