Dealer Option

What Is a Dealer Option?

A dealer option is a contract issued on the physical inventory of a commodity. A dealer option is typically issued by companies that buy, sell, or otherwise utilize a commodity in leading business. This type of option isn't traded on an exchange. Rather, it is traded as a over-the-counter (OTC) security and is hence less subject to examination and regulation.

Figuring out Dealer Options

Dealer options are typically [written](/composing an-option) by firms, for example, clearinghouses, that hold the physical commodities and afterward offer them to the public on the OTC market. While dealer options exist outside of traditional trading markets, their sale is still intensely investigated on the grounds that they address a contract between parties.

The organizations that deal in these types of contracts typically hold adequate amounts of the physical commodity or cash to fulfill either a call or put contract, whichever they opt to enter.

How Dealer Options Work

Since dealer options are traded over the counter, typically by individuals engaged with the physical commodity, the options can be utilized to take physical possession of a commodity, or transfer that commodity to another party by means of the contract.

Since the contracts are traded OTC, the gatherings can settle on customized terms. Dissimilar to an exchange traded futures contract which includes a specific amount of a certain grade of the commodity, the dealer option could be for any amount or grade the two gatherings consent to.

A dealer might have 150 ounces of gold to sell. Another party is keen on buying 150 ounces of gold, later on, on the off chance that gold prices keep on rising. Exchange traded futures and options are normalized to 100 ounces, leaving both the seller and buyer with 50 ounces to dispose of or get. A dealer option tackles this problem.

The price of gold is $1,500. The two gatherings concur that the buyer will buy at a call option with a strike price of $1,550. The call option will lapse in 90 days. In exchange for the right to buy the gold at $1,550 per ounce, even on the off chance that it goes a lot higher in the next 90 days, the option buyer consents to pay the option seller a premium.

In the event that the price doesn't rise above $1,550, then there is no requirement for the option buyer to exercise the contract and buy the gold at $1,550, since it is less expensive to buy the gold on the open market where it is trading below $1,550. In this scenario, the option seller will keep the premium as well as their gold.

If the price of gold moves above $1,550, the option buyer will exercise their option. It is beneficial to do as such since the price of gold is currently above $1,550 an ounce. The seller will give the 150 ounces of gold, possibly by means of a vault receipt, and the option buyer will pay the option seller $1,550 x 150 ounces.

Dealer options are traded OTC and expect that the other party have the option to hold up their part of the bargain. Therefore, these types of agreements are made between firms or people that know each or have monetarily checked one another.

Features

• Dealer options are not traded on an exchange, yet rather as an over-the-counter (OTC) security, meaning it's less subject to investigation and regulation.
• Since the contracts are traded OTC, the gatherings can settle on customized terms. Therefore, these types of agreements are made between firms or people that know each or have monetarily confirmed one another.
• A dealer option is a contract issued on the physical inventory of a commodity.