Listed Options
A listed option is one that trades on an exchange. The most important option exchanges for financial securities are the:


Standardized Option Features and Benefits
You need to remember that the asset underlying an option can be just about anything, and some of the more exotic derivatives will be covered later. For now, the discussion will be confined to stock options trading on the CBOE.

Listed stock options have the benefit of being standardized in terms of the following:

  • number of shares of underlying common stock,
  • delivery dates, and
  • range of exercise prices.

Benefits

  • Standardization allows the exchange to operate efficiently as a secondary market for these options which were strictly a principals-only business until the 1970s.

  • The secondary market provides greater liquidity for options in general and thus greater value for each of the instruments individually.

  • Prices and volumes can be reported more accurately, so the market is transparent.

  • Regulators hold some real oversight power, so all the players can be assured that trading in listed options is a reasonably fair game.

  • Potential Consequences
    • The CBOE is just a place to trade options, not a guarantor that all parties and counterparties will act honorably and play by the rules.
    • As you might guess from the example above, the person who writes an option to sell a $36 stock at $25 might not be happy about it. He might try to renege.
    • This is a risk that one would have to accept to do business in the options market.


The Options Clearing Corporation (OCC)
If a writer breaches contract, the guarantor of all CBOE-traded options - the OCC - will step in. Organizationally independent of the exchange, yet virtually its conjoined twin, the OCC requires option sellers to post margin to guarantee that they will fulfill their contracts.

  • Technically, the OCC is the issuer of all exchange-listed options, so the buyer is insulated from any malfeasance on the part of the seller.
  • In fact, there is more insulation than that. The buyer and seller generally have brokers; these brokers generally work through clearing members who participate directly in trading at the exchange, and the clearing members are the ones who deal directly with the OCC.


Calls and Puts

Related Articles
  1. Investing

    Types of Options

    There are many different types of options. In addition to general put options and call option, we will discuss 13 different types of options. Some of these option types are better suited to day ...
  2. Investing

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  3. Trading

    Introduction - Day Trading and Options

    Options have not been a tradition part of day-trading strategy, but this is quickly changing.
  4. Trading

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  5. Markets

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  6. Investing

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
  7. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  8. Trading

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
  9. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  10. Trading

    Getting Started In Forex Options

    Stocks are not the only securities underlying options. Learn how to use FOREX options for profit and hedging.
Trading Center