OPTIONS & DERIVATIVES TRADING OPTIONS TRADING STRATEGY & EDUCATION
Exchange-Traded Option
By AKHILESH GANTI Updated October 05, 2021
Fact checked by SUZANNE KVILHAUG
What Is Exchange-Traded Option?
An exchange-traded option is a standardized derivative contract, traded on an exchange, that settles through a clearinghouse, and is guaranteed.
Understanding Exchange-Traded Option
An exchange-traded option is a standardized contract to either buy (using a call option), or sell (using a put option) a set quantity of a specific financial product, on, or before, a pre-determined date for a pre-determined price (the strike price).
Exchange-traded options contracts are listed on exchanges such as the Chicago Board Options Exchange (CBOE). 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 such as the Options Clearing Corporation (OCC).
KEY TAKEAWAYS
Benefits of Exchange-Traded Options
Exchange-traded options, also known as 'listed options', provide many benefits that distinguish them from over-the-counter (OTC) options. Because exchange-traded options have standardized strike prices, expiration dates, and deliverables (the number of shares/contracts of the underlying asset), they attract, and accommodate, larger numbers of traders. OTC options usually tend to have customized provisions.
This increased volume benefits traders by providing improved liquidity and a reduction in costs. The more traders there are for a specific options contract, the easier it is for interested buyers to identify willing sellers, and the narrower the bid-ask spread becomes.
The standardization of exchange-traded options also enables clearinghouses to guarantee that options contract buyers will be able to exercise their options—and that options contract sellers will fulfill the obligations they take on when selling options contracts—because 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 more easily because the terms of the contracts are all the same, making them interchangeable. This feature greatly enhances the appeal of exchange-traded options, as it mitigates the risk involved in transacting in these types of securities.
Drawbacks of Exchange-Traded Options
Exchange-traded options do have one significant drawback in that since they are standardized, the investor cannot tailor them to fit their requirements exactly. Unlike OTC options—which are not standardized, but are negotiated directly between the buyer and the seller—exchange-traded options cannot be customized to fit the buyer's or seller's specific goals. However, in most cases, traders will find exchange-traded options provide a wide enough variety of strike prices and expiration dates to meet their trading needs.
Related Terms
Options Industry Council (OIC) Definition
The Options Industry Council (OIC) serves as the industry resource for equity options education, and it is sponsored by a variety of corporations. more
Exchange Traded Derivative
An exchange traded derivative is a standardized derivatives contract traded on a regulated exchange. more
Flexible Exchange Option (FLEX) Definition
Flexible exchange options allow both the writer and purchaser to negotiate various terms, such as exercise style, strike price, and expiration. more
What Is the Last Trading Day?
The last trading day is the final day that a contract may trade or be closed out before the delivery of the underlying asset or cash settlement must occur.more
Optionable Stock Definition
An optionable stock is one where the stock has the necessary liquidity such that a market maker, like a bank, lists that stock's options for trading. more
CFLEX Definition
CFLEX is an electronic system for trading flex options, or options that do not possess standard conditions. more
Related Articles
OPTIONS & DERIVATIVES TRADING
Examples Of Exchange-Traded Derivatives
OPTIONS TRADING STRATEGY & EDUCATION
Understanding Warrants and Call Options
OPTIONS TRADING STRATEGY & EDUCATION
What Is Required for a Stock to Trade as an Option?
OPTIONS TRADING STRATEGY & EDUCATION
The History Of Options Contracts
OPTIONS TRADING STRATEGY & EDUCATION
Mini Options: A Useful Tool for Trading High-Priced Securities
INVESTING
Options Trading Strategies: 4 Strategies for Beginners
About Us
Terms of Use
Dictionary
Editorial Policy
Advertise
News
Privacy Policy
Contact Us
Careers
California Privacy Notice
Investopedia is part of the Dotdash publishing family.
Ad