I rarely engage in directional trades on a single equity any longer, but when I did, I usually did so after a study of price and volume behaviors. Such was the case in May, 2008, when a combination of price action, chart formations and other technical signals combined with volume to convince me to enter a small directional put position on IYT.

Annotated Daily Chart of IYT:

I typically scanned for unusual volume to search for such opportunities. I likely identified IYT weeks earlier, watching some cases when unusually high volume accompanied some days when IYT butted up against resistance and then retreated by the end of the day. Such days showed that there was at least some selling and probably institutional selling. When volume is much higher than normal, only institutional volume can be responsible for that kind of volume spike. Then, if there's a pullback by day's end, leaving a little candle shadow, we can conclude that the institutions must have been doing at least a little selling. When institutions are selling into a climb, Tom Williams, author of Master the Markets advises, their selling sometimes swamps retail traders who are buying at the high.

Then I was looking for a later time when a resistance test was met with low volume, suggesting that the outcome had then been decided. Institutions had sold and weren't interested in buying at those levels. When that happened, I bought a couple of puts, a speculative play with lotto money.

However, my scans frequently turn out likely candidates that have no options. Since I'm frankly just too chicken to short a stock or ETF, I pass on those possibilities.

This has been a long lead-in to the topic of this article: who or what determines whether a stock has options? However, I wanted to seat that discussion in the context of a real-life screen I used to perform to find trading candidates.

CBOE rules 5.3 and 5.4 make that determination of which stocks are optionable. A January 25, 2010 CBOE "Ask the Institute" answer listed general rules. Those rules include a stock that trades on a national securities exchange with a float of at least 7 million shares held by at least 2000 shareholders. For at least 5 consecutive days before listing, the stock must have closed over $3.00 per share. More requirements can be found at this link. Rule 5.3 clarifies that, "in exceptional circumstances an underlying security may be approved . . . even though it does not meet all the guidelines." Trading volume guidelines require volume of at least 2.4 million shares in the twelve preceding months.

Obviously, that last rule might cause some difficulties for spin-offs, reorganizations or other corporate transactions, so special rules cover those situations, too. Rules address indices, currency- or commodity-related securities and other special underlyings that aren't companies as we generally think of them.

Reading through the rules turns up many amendments, with the first from January 3, 1975. Obviously, as the options market has changed, so have some of those rules. One rule that perhaps has presented special challenges through the last years has related to the required share price for companies that have seen their share prices tumble. Rule 5.4 is titled "Withdrawal of Approval of Underlying Securities" and addresses this subject.

When a security no longer meets the requirements for listing options, the appropriate exchange makes that determination, and then the exchange is prohibited from opening for trading "any additional series of options of the class covering that underlying security." The exchange may also prohibit buying- or selling-to-open options in previously opened series, therefore prohibiting the opening of any new options positions, except under certain conditions. Again, this rule can be suspended under "exceptional circumstances." If those exceptional circumstances are not present, however, no further options series will be opened if the float held by less than 1,600 "beneficial" shareholders drops below 6.3 million, trading volume drops below 1.8 million over the preceding twelve months, and the stock is no longer listed by one of the exchanges covered by Regulation NMS of the Securities Exchange Act of 1934, among other rules. Specifications for index-linked securities, corporate debt securities, HOLDRS, and other securities may differ but the applicable rules are also discussed in Rule 5.4.

The Options Clearing Corporation lists any change in options contracts and also provides a PDF that, to the best of their efforts, lists "exchange-traded options issued by The Options Clearing Corporation." Most trading platforms also will let you screen for optionable securities when performing screens to find securities that meet certain trading criteria.

An option trade may not always be the best bet for all trades or all traders. While discussing what determines whether a securities has options, it's appropriate to mention that the OIC also provides the "Characteristics & Risks of Standardized Options" document that we should all review from time to time. In some cases, it's not even a possibility to trade options, but fortunately for those who want to employ options as insurance--their original purpose-- or to create income or to speculate, CBOE Rules 5.3 and 5.4 do their best to ensure that the options we buy are on valid companies or securities.