Saturday, August 24th, 2019

United States vs. Other Options Trading

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

 

The rules of options trading vary from country to country. In the United States it is possible to trade options and to exercise options throughout the life of the options contract. On the other hand a European option can only be exercised upon expiration. A general term for a complex option contract is an “exotic” option and any very standard option contact can be described as a vanilla option.

In the United States, options trading takes place for the start of the options contract until expiration, during trading hours, when it is not an exchange holiday such as January 1, national holidays and Christmas. Standard options expire on the last day of the month of March, June, September, and December. Thus standard options run three months.

On the other hand long term options, LEAPS (Long Term Equity Anticipation Securities) run for up to three years. These options are also tradable throughout the term of the contract and are attractive to more conservative investors and traders.

In European options trading the option can only be exercised on the expiration date although it can be traded throughout the life of the contract. In options trading with a Bermudan contract there are specified dates during the life of the options contract when one can exercise the option.

A barrier option contract is written so that the option can only be exercised if certain criteria are met or “barriers” exceeded.

The kind of complex options trading that requires an “exotic” option contract may be seen in very sophisticated and complex financial arrangements and are not typical of standard options trading in the American or other markets. Most options trading is in plain vanilla options. That does not mean that options trading is all that simple but that the nature of the contact is clear and not unduly complicated. The vagaries of the stock market and other underlying investments allows for enough complication as is.

The American options trading system with its possibility of exercising options throughout the course of the options contract provides for a more fluid system than the European options trading system of the Bermudan system. However, the ability trade in and out of options trading contract still provides flexibility to the non American options trading systems.

In each of the international options trading systems the principles are the same. One buys or sells the option to buy or sell the underlying stock, bond, commodity, or futures contract at a set price. One tries to anticipate where the price of the underlying asset will go in order to make a profit on the difference in price between the strike price and the spot price or on the premium paid for the option.

Using the American option or any option trading system there are very safe “bets” and potentially dangerous “bets.” It is always best to hedge against options trading strategies such as short straddles where recent history tells us that a single trader can bring down a banking empire as was the case with a single trader who “bet” wrong on using a short straddle and bankrupted Barings Bank with a 1.4 Billion dollar loss.

Related Educational Products:

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!