An option contract is a legal agreement allowing the buyer (holder) of the option to either buy (in the case of a call option) or sell (in the case of a put option) an agreed-upon quantity of an underlying asset at an agreed-upon price within a specified time frame. Options contracts are used in many different markets worldwide, including stocks, commodities, and currencies.
History of options and stock exchanges
When you look at options contracts on any given exchange, some are listed by dealers and some by individual investors. Stock options traded via dealers on exchanges worldwide started in 1973 when two former professors, Henry O’Connor and Stephen Outram, created what they called “quotes for the difference.” In the 1980s, a combination of new technology and a desire by O’Connor and Outram to expand their business-led these two men to create what is now known as the Cincinnati Stock Exchange.
What is a listed option?
In short, an option that is bought from a dealer on an exchange is one where it can be guaranteed that there will be someone willing to buy or sell the contract at any given time. When you purchase such an option, you are then considered long the option; if you were to sell it right away, you would not make much money because there isn’t anyone out there who wants to buy the options in question at this time. It means investors must wait until someone else comes along and decides they want to take on this risk for whatever reason they have
The other type of options contract is one listed by individual investors on an exchange. You are not guaranteed that there will be someone out there willing to buy or sell the contract at any given time when you purchase this kind of option, so you are taking an additional risk when you go into it.
However, purchasing this option can also be very profitable because it costs less than options purchased from dealers on exchanges in most cases, meaning more money stays in your pocket when everything has been said and done. It’s why beginning investors may prefer using these types of options rather than ones purchased from dealers – although experienced investors would probably recommend going with the dealer-bought variety if possible due to the experience garnered over time.”
Benefits of options listed on an exchange
Ever since the listing of options on exchanges, they have been gaining prominence and popularity among traders and investors owing to several benefits that they offer. There are lots of reasons why one should be interested in trading an option listed on an exchange. Some of the prominent ones include:
- Exchange-listed options provide you with a large number of choices for your investment horizon. You can invest short term by choosing call or put options that have expiry dates up to three months away or choose more extended investment periods.
- Exchange-listed options come with standardized terms and conditions, which makes it easy for any investor, whether they have prior trading experience or not.
- Exchange-listed options bring greater visibility for your investments than investing in over the counter (OTC) derivatives. The exchange system allows you to monitor news and price information related to all the companies whose shares are available for trading, including future commitments like dividends or stock splits which influences their performance.
- Exchange-listed options offer better security by providing more transparency in daily price limits and margin requirements. You can also use tools like stop-loss orders that help you counter any sharp market movements and prevent potential losses.
To conclude
Trading on exchanges is not without its share of risks and pitfalls that you must keep in mind to avoid any losses or negative consequences in your investments. You should go through all the available literature and documentation before talking to an expert adviser from Saxo Bank; look here to get started with your investments.
