Exchange-Traded Option
What Is an Exchange-Traded Option?
An exchange-traded option is a normalized derivative contract, traded on an exchange, that settles through a clearinghouse and is guaranteed.
Understanding Exchange-Traded Options
An exchange-traded option is a normalized contract to either buy (utilizing a call option), or sell (utilizing a put option) a set quantity of a specific financial product, on, or before, a foreordained date at a foreordained cost (the strike price).
Exchange-traded options contracts are listed on exchanges like the Cboe Options Exchange. The exchanges are overseen by regulators — including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) — and are guaranteed by clearinghouses, for example, the Options Clearing Corporation (OCC).
Benefits of Exchange-Traded Options
Exchange-traded options, otherwise called 'listed options', give many benefits that recognize them from over-the-counter (OTC) options. Since exchange-traded options have normalized strike prices, expiration dates, and deliverables (the number of shares/contracts of the underlying asset), they draw in, and oblige, bigger numbers of traders. OTC options normally will more often than not have altered provisions.
This increased volume benefits traders by giving improved liquidity and a reduction in costs. The more traders there are for a specific options contract, the simpler it is for intrigued buyers to recognize willing sellers, and the smaller the bid-ask spread becomes.
The standardization of exchange-traded options likewise enables clearinghouses to guarantee that options contract buyers will actually want to exercise their options — and that options contract sellers will satisfy the obligations they take on while selling options contracts — on the grounds that the clearinghouse can match any of a number of options contract buyers with any of a number of options contract sellers. Clearinghouses can do this all the more effectively on the grounds that the terms of the contracts are no different either way, making them interchangeable. This feature significantly upgrades the appeal of exchange-traded options, as it mitigates the risk implied in executing in these types of securities.
Drawbacks of Exchange-Traded Options
Exchange-traded options in all actuality do have one huge drawback in that since they are normalized, the investor can't fit them to precisely accommodate their requirements. In contrast to OTC options — which are not normalized, yet are negotiated straightforwardly between the buyer and the seller — exchange-traded options can't be tweaked to fit the buyer's or alternately seller's specific objectives. Be that as it may, generally speaking, traders will find exchange-traded options give a sufficiently wide assortment of strike prices and expiration dates to meet their trading needs.
Features
- An exchange-traded option is a normalized derivative contract, traded on an exchange, that settles through a clearinghouse, and is guaranteed.
- A key feature of exchange-traded options that draw in investors is that they are guaranteed by clearinghouses, for example, the Options Clearing Corporation (OCC).
- Exchange-traded options contracts are listed on exchanges, for example, the Cboe Options Exchange, and overseen by regulators, similar to the Securities and Exchange Commission (SEC).
