Listed options and OTC (Over the Counter) options offer potential investors the ability to speculate on future movements in underlying assets, but there are several distinctions between the two.
Check this site for more information on listed options, or stay tuned to learn more about the differences.
Listed options trade on exchanges and are therefore subject to the rules and regulations of that exchange, meaning the prices of listed options are more transparent, as they are determined by supply and demand in the marketplace. In contrast, OTC options are traded between two parties without going through an exchange. As a result, the prices of OTC options are less transparent and may be influenced by factors such as the counterparty’s creditworthiness.
Listed options typically have a standard contract size of 100 shares, while the buyer or seller can customise OTC options to their needs. This flexibility can benefit investors who want to tailor their position to a specific asset or market conditions.
Listed options are settled in cash, while OTC options are often settled in shares of the underlying asset. It can be advantageous for investors who want to deliver the asset physically, but it also introduces counterparty risk.
Listed options are subject to more stringent regulation than OTC options because exchanges must meet specific requirements to list options contracts. For example, the underlying asset must be liquid, with enough interest from buyers and sellers to create a market. In contrast, OTC options are not subject to these requirements, making them riskier.
Listed options are more accessible than OTC options, as traders can trade them on exchanges that are open to the public. It means that anyone with an account can trade listed options. In contrast, OTC options are often traded through private deals between parties who have established a relationship. As a result, they can be more difficult for investors to access.
How to trade listed and OTC options
Determine your strategy
The first step in trading options is determining your investment goals and objectives. Are you looking to speculate on the future direction of an underlying asset, or are you looking to hedge your portfolio against downside risk? Once you know your goals, you can develop a strategy that fits your needs.
Choose your broker
If you want to trade listed options, you must open an account with a broker that offers this service. Most significant brokers offer listed options trading, so you should have no trouble finding one that meets your needs. If you want to trade OTC options, you may need to find a broker specialising in this type of trading.
Select your underlying asset
Once you have chosen a broker, you must select an underlying asset to trade. It can be anything from stock or ETF to a commodity or currency. The underlying asset choice will depend on your investment goals and your strategy.
Choose your option type
Once you have selected your underlying asset, you must choose the type of option you want to trade. There are two main types of options: call options and put options. Call options give you the right to buy an underlying asset at a specific price, while put options give you the right to sell an underlying asset at a specific price.
Select your expiration date
The expiration date is when the option contract expires; the date at which the option holder has the right to exercise their option. Expiration dates can be short-term or long-term, depending on your investment goals.
Choose your strike price
The strike price is the price at which the underlying asset can be bought or sold if the option is exercised. The strike price will be different for call options and put options. For call options, the strike price is usually set below the current market price of the underlying asset. For put options, the strike price is usually set above the current market price of the underlying asset.
Place your order
Once you have chosen all the variables for your trade, you must place an order with your broker. Your broker will then execute the trade on your behalf.
Listed options and OTC options both offer plentiful opportunities for traders. Depending on your trading preferences, you can place orders for both or neither. Just remember that before opening positions, you should always ensure you know what you are purchasing and how the underlying asset works.