OTC options are traded between two counterparties in a private transaction, whereas listed options are traded on an exchange. Listed options have standardised contract terms and trade on a centralised exchange with clearing provided by the exchange. OTC options don’t have standardised contract terms and may be customised to the needs of the parties involved in the transaction. Because they’re not traded on an exchange, there’s no central location for clearing OTC options trades.
Another critical distinction is that listed options are regulated by the SEC, while OTC options are not, which means there are rules governing how traders can trade listed options and what types of orders can be placed. These rules don’t apply to OTC options since they’re not traded on an exchange.
Listed options are also more liquid than OTC options because there’s more activity in the listed options market and more participants (e.g., market makers, specialists, etc.). The increased liquidity results in tighter bid-ask spreads for listed options.
Finally, OTC options tend to be less expensive than listed options because the lack of regulation surrounding OTC options allows for a greater degree of flexibility when it comes to pricing. Novice traders should look at Saxo Capital Markets before trading in options.
What are the benefits of investing in listed options?
Listed options offer several benefits to investors. First, they provide a way to hedge risk. Listed options can hedge against the risk of price movements in the underlying asset. For example, if you own shares of ABCD Corporation, you could purchase put options on ABCD stock to protect yourself against a decline in the stock price.
Second, traders can use listed options to generate income. You can do this by selling options that you believe will expire worthlessly (i.e., “writing” or “selling” options). For example, if you think XYZ stock will stay flat over the next month, you could sell XYZ call options and collect the premium as income.
What are the benefits of investing in OTC options?
OTC options offer a few benefits that listed options don’t. First, traders can customise OTC options to the needs of the parties involved in the transaction. This flexibility isn’t possible with listed options since they have standardised contract terms.
Second, OTC options don’t have to be reported to the SEC, which means less paperwork and compliance burden is associated with OTC options.
What are the risks associated with listed options?
Listed options are risky because they’re subject to the underlying asset’s volatility, which means that the option price can fluctuate dramatically, and investors could lose a significant amount of money.
Another risk is that listed options are often illiquid, so finding a buyer or seller may be difficult when you want to exit your position. This can result in significant losses if you’re forced to sell at a low price.
Lastly, listed options are also susceptible to manipulation because no central authority regulates the market. As such, unscrupulous traders can exploit unsuspecting investors by artificially inflating prices or creating false rumours.
What are the risks associated with OTC options?
OTC options trading can be risky because they’re not subject to the same regulations as listed options, which means less market oversight, which increases the chances of fraud and manipulation.
Another risk is that OTC options are often illiquid, which means finding a buyer or seller may be difficult when you want to exit your position. This can result in significant losses if you’re forced to sell at a low price.
Lastly, OTC options may be less expensive than listed options, but this doesn’t mean they’re a good value because the lack of regulation surrounding OTC options allows for a greater degree of flexibility when it comes to pricing. As such, investors could end up paying more than they should for an OTC option.
The bottom line
While there are some critical differences between listed and OTC options, it’s important to note that traders can use them to achieve similar investment objectives. For example, both types of options can be used to speculate on the direction of a security’s price or to hedge against risk. Overall, the choice of which type of option to use will depend on the specific needs of the investor.