What are listed options?
A listed option is a standardised derivative contract traded on an exchange settled through a clearinghouse and guaranteed.
Understanding listed Options
A listed option is a standardised contract for either purchasing (using a call option) or selling (using a put option) a specified quantity of a specific financial instrument at a pre-agreed price on or before a predetermined date.
Listed options contracts are traded on exchanges such as the Chicago Board Options Exchange. Regulators, including the Securities and Exchange Commission, Commodity Futures Trading Commission, and Options Clearing Corporation, maintain watch over exchanges.
Benefits of Listed options
A variety of benefits distinguish listed options from over-the-counter (OTC) options. Listed options have standardised strike prices, expiration dates, and deliverables (the number of shares/contracts of the underlying asset), which attract and accommodate a more significant number of traders. The majority of OTC options typically include tailored provisions.
Increased volume is beneficial to traders since it improves liquidity and lowers costs. The greater the number of sellers for a specific option contract, the easier it is for interested purchasers to locate willing sellers, and the narrower the bid-ask spread becomes.
Standardisation of listed options also allows clearinghouses to guarantee that option contract purchasers will be able to exercise their contracts. Option contract sellers will fulfil their obligations when selling options contracts since the clearinghouse can match various buyers and sellers. Clearinghouses can achieve this by using a limited number of identical contracts, making them interchangeable. This feature greatly enhances the appeal of exchange-traded options by reducing the danger of trading these kinds of securities.
Drawbacks of listed options
One disadvantage of listed options is that the investor cannot customise them to suit their specific needs because they are standardised. Listed options, unlike over-the-counter alternatives, are not customised to fit a buyer’s or seller’s particular objectives. However, in most cases, listed options will provide a sufficient range of strike prices and expiration dates to meet the needs of most traders.
An options contract is an agreement to buy or sell the underlying security on or before a given date. The price agreed upon is called the strike price, and the date chosen is referred to as the expiration date. That’s very straightforward. However, it may also be traded “on margin”, using borrowed money (or some other form of leverage), which multiplies both potential profits and losses.
The above definition might cause intimidation for those without knowledge about options trading, but ultimately, options are not complex instruments. Options can be more complicated than futures contracts because more factors are involved, but they also make it easier to profit no matter whether prices rise or fall – all you need to do is correctly predict where they will go in the future.
The basic premise in options trading is simple: Buy an option when you think the underlying security price will rise in value over time and sell when you think it will fall. This method has been around for many years. Still, it has only recently started to become well-known outside of financial circles – this is mainly due to the widespread availability of online brokerage accounts, which facilitate their ease of use by retail traders.
The primary benefits of listed options have already been discussed, and it’s clear why they’ve recently become the focus of attention in financial circles. With internet brokerages providing direct access to the options markets at a low cost, most retail investors now can use the most potent instrument in the investment industry, just like professionals do.
So, take the first step and devote some effort to learning how to utilise listed options effectively. Individual investors are about to enter a new era. Don’t get left behind! Want to start trading listed options? Sign up for a free trial here!