On options exchanges, the exercise prices are standardized. The exchange prescribes the exercise prices at which options can be written. Investors must be willing to trade options with the specified exercise prices. Of course, over-the-counter transactions can have any exercise price the two participants agree on.
The exchange’s objective in establishing the exercise prices is to provide options that will attract trading volume. Most option trading is concentrated in options in which the stock price is close to the exercise price.
Accordingly, exchange officials tend to list options in which the exercise prices surround but are close to the current stock price. If the stock price moves up or down, new exercise prices close to the stock price are added
In 1993 the CBOE launched the FLEX (for flexible) options, a new type of option that represented a dramatic departure from the standardization of organized options markets. FLEX options are available with a minimum face value of $10 million for index options and 250 contracts for option on individual stocks.
When a stock pays a dividend, the stock price falls by the amount of the dividend on the ex-dividend day, which is the day after the last day on which the purchaser of the stock is entitled to receive the upcoming dividend. Because call option holder do not receive dividends and benefit from increase in the stock price and put option holders benefit from stock price decrease, the ex-dividend decrease in the stock price would arbitrarily hurt call holders and help put holders. In the old over-the-counter options market, options were said to be dividend-protected. If the company declared a $1 dividend, the exercise price was reduced by $1. Since over-the-counter options were not meant to be traded, the frequent dividend adjustments caused no problems. For exchange-listed options, however, such dividend adjustments would have generated many nonstandard exercise prices. Thus, the exchanges elected not to adjust the exercise price when a cash dividend was paid.