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Ask TheStreet: The Path to Options

Steven Smith

Editor's Note: Ask TheStreet is designed to answer questions about the market, terms, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment- or stock-related advice.

I would like to know how and when the decision to issue options on a stock are made? Currently, Denny's does not have options. How would it go about getting options for its stock? Thanks, Peter

The decision to list options rests solely with the options exchanges. A publicly traded company has no say in the listing of related exchange-traded options. Guidelines are set forth by the Securities and Exchange Commission, but the ultimate requirements and decision to list options rest with each individual exchange.

That said, the requirements are fairly uniform across all of the exchanges. And given the competitive nature of the industry, if one exchange decided to list a contract, the others would likely follow suit.

The basic requirements are as follows:

• The underlying security should have a public float (excluding shares held by officers and shareholders controlling more than 10% of the outstanding shares) of 7 million shares.
• There should be at least 2,000 holders of the underlying security.
• Shares of the underlying security should have traded a minimum of 2.4 million shares during the 12 months preceding the listing.
• Shares of the underlying security must trade on a national stock exchange.
• The share price of the underlying security trade must be above $3 for five consecutive days.

This $3 minimum price threshold was amended two years ago and is a change from the original rule, which required shares to trade above $7.50 for at least 50% of the days during the three-month period prior to listing options.

This has allowed options on popular stocks to be listed almost immediately after a company's initial public offering. One of the first -- and certainly most high-profile -- examples of breaking the time barrier was when Google(GOOG - Cramer's Take - Stockpickr) options were listed just five days after the company's IPO.

Denny's(DENN - Cramer's Take - Stockpickr) seems to meet all of the above requirements, so my best guess is that either the exchanges, specialists or both just don't think there will be sufficient interest to make it worth the cost of listing (filing legal and regulatory papers) and maintaining (disseminating market data such as live bid/ask and trade quotes for all the strike prices) an options market in Denny's.