Sunday, December 16th, 2018

Kinds of Options Trading

November 26, 2009 by T.D. Thompson  
Filed under Options Trading Tips

 

The kinds of options trading available include over-the-counter options trading and exchange options trading, or trading listed options. Exchange traded options are, in fact, exchange traded derivatives. The trades are guaranteed by the credit of the exchange. In exchange options trading you can trade stock options, commodity options, bond and other interest rate options, stock market index options, and future contract options. In over the counter options trading the contracts are between individuals and can be tailored to any specifications. These options, often called dealer options, are not traded on an exchange but could be traded individually.

Because options trading in exchange traded options is, in derivatives handled by the exchange, trading is very fluid. The exchange has up to the second pricing and, typically, sufficient volume that trading is unimpeded throughout the day.

To trade an exchange traded option you will need an account with the exchange and a reserve balance. Trading can be done online with the ability to buy and sell throughout the day. The Chicago Board Options Exchange, for example, is open to trading from 9:30 am to 4 pm Eastern US time.

Besides stocks, exchange traded options include commodities. A commodity is any raw material such as gold, coal, or oil. As with stocks, in options trading in commodities, in the USA, you can trade your option any time up until the option’s expiration date.

Exchange traded options also include bonds. This is similar to options trading in stocks. You trade with expectation of earning a premium when selling a put or call and buy making a profit from the difference in the spot price and strike price. As with options trading in stocks it is possible to lose substantially on selling uncovered puts if the bond price drops substantially.

Trading in stock market index options is, like other exchange traded options, trading in derivatives. A stock market index may be as broad as the Russell 3000 or the S&P 500 or can be tailored to very specific business sectors such as mining, oil, semiconductors, or genetic engineering stocks.

Regulated by the Commodity Futures Trading Commission, future contract options are the business of buying puts and calls on futures contracts. Buying a call means that you purchase the option to buy the futures contract and buying a put means that you purchase the option to sell the futures contract, exactly like options trading in stocks.

In the United States trading can take place any time from the origination of the contract until the contract expires. The use of derivatives through a clearing house with exchange traded options makes options trading in the USA very fluid and reasonably transparent.

Dealing in over the counter options trading is quite limited and typically restricted by contact to the two parties involved although one could write a specific options contract allowing the buyer of the option to transfer his or her right. Trading over the counter options is very specific and best limited to those with intimate knowledge of the business transaction underlying the option contract.

Another type of option, a stock option, is not tradeable. It is an employee benefit which the employee may exercise what is essentially a call option allowing them to buy stock at a lower, “strike,” price and own a substantially more valuable stock as the company grows and prospers.

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