What Is an Exchange-Traded Option?

An exchange-traded option is a standardized derivative contract, traded on an exchange, that settles through a 澳洲幸运5官方开奖结果体彩网:clearinghouse and is guaranteed.

Understanding Exchange-Traded Options

An exchange-traded option is a standardized contract to either buy (using a 澳洲幸运5官方开奖结果体彩网:call option), or sell (using a 澳洲幸运5官方开奖结果体彩网:put option) a set quantity of a specific financial product, on, or before, a predetermined date for a predetermined price (the 澳洲幸运5官方开奖结果体彩网:strike price).

Exchange-traded options contracts are listed on exchanges such as the 澳洲幸运5官方开奖结果体彩网:Cboe Options Exchange. The exchanges are overseen by regulators—including the 澳洲幸运5官方开奖结果体彩网:Securities and Exchange Commission (SEC) and the 澳洲幸运5官方开奖结果体彩网:Cꦇꦚommodity Futures Trading Commission (CFTC)—and are guaranteed by clearinghouses such as the 澳洲幸运5官方开奖结果体彩网:Options Clearing Corporation (OCC).

Benefits of Exchange-Traded Options

Exchange-traded options, also known as 'listed options', provide many benefits that distinguish them from 澳洲幸运5官方开奖结果体彩网: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. 澳洲幸运5官方开奖结果体彩网:OTC options usually tend to have customized provisions.

This increased volume benefits traders by providing improved 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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.