What Is Exchange-Traded Option? 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).
- An exchange-traded option is a standardized derivative contract, traded on an exchange, that settles through a clearinghouse, and is guaranteed.
- Exchange-traded options contracts are listed on exchanges, such as the Chicago Board Options Exchange (CBOE), and overseen by regulators, like the Securities and Exchange Commission (SEC).
- A key feature of exchange-traded options that attract investors is that they are guaranteed by clearinghouses, such as the Options Clearing Corporation (OCC).
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
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.
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 is an electronic system for trading flex options, or options that do not possess standard conditions. more
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