Options and listed options are financial instruments that traders can use to speculate on the future direction of an underlying asset, such as a stock, index, or commodity. Both types of instruments give the holder the right, but not the obligation, to buy or sell the underlying asset at a predetermined price on or before a specified date. However, there are some differences between these two types of instruments that investors should know before trading.
Options vs listed options
Listed options are traded on exchanges like the New York Stock Exchange (NYSE) and are regulated by the Securities and Exchange Commission (SEC). On the other hand, options can be traded over-the-counter (OTC) or through electronic platforms that are not subject to SEC regulation. Listed options are generally more liquid and have narrower bid-ask spreads than OTC options.
Another key difference between listed and OTC options is the pricing. Listed options are priced using a Black-Scholes model, which considers the underlying asset’s volatility, dividend yield, time to expiration, and risk-free interest rate. OTC options are often priced using a different model or no model, making it difficult to compare prices between the two types of instruments.
The final difference between listed and OTC options is that listed options can be exercised while OTC options cannot. This means that the holder of a listed option can exercise their right to buy or sell the underlying asset at the specified price on or before the expiration date. OTC options holders do not have this option and must instead sell their option to another party if they want to exit their position.
Which type of option is right for you?
If you are looking for a liquid, regulated instrument priced using a well-known model, then listed options are the way to go. However, if you are looking for an over-the-counter option with a more flexible pricing model, OTC options may be a better fit for you.
Listed options offer several advantages over options that are not listed. For one, they are much easier to trade. Listed options are also more liquid than their non-listed counterparts, which can be bought and sold more quickly. Finally, listed options are traded on exchanges and are subject to regulatory oversight.
All of that being said, listed options are not always available, and in some cases, you may only be able to buy or sell options that are not listed.
How do you know which type of option you’re dealing with?
The easiest way to tell is by looking at the ticker symbol. If the symbol has an “X” at the end, it’s an option not listed. If the symbol does not have an “X” at the end, it’s a listed option.
Advantages of listed options
Listed options offer several advantages
More liquidity
There are more buyers and sellers in the market for listed options, so it’s easier to find a willing counterparty when you want to trade. This also makes it easier to get out of a position if you need to
Transparency
All trades are public information, so you can see what prices people are willing to pay or accept. This helps you gauge market sentiment and make better-informed trading decisions.
Bottom line
There are pros and cons to both listed and over-the-counter options when it comes to options trading. Whichever option you choose, make sure to do your homework and understand the risks involved before trading. It’s essential to understand the difference before deciding which option is right for you. In general, listed options offer more liquidity and transparency, while over-the-counter options can be customized to fit your individual needs. New traders should use a reputable and reliable online broker from Saxo Bank. For more information, visit their website here.
