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What is the difference between options and listed options?

In a world where everything is constantly changing, it can be a challenge to keep up with the latest terminology and jargon. Many of us have heard of “options” but may not know what they are or how they work.

If you want to start trading options, you must have a solid understanding of what options are all about before delving in head-first. In this article, we’ll discuss listed vs non-listed possibilities, as well as some other key differences between them.

What Are Options?

In the finance world, an option gives someone the right to buy or sell something at a particular time in the future for a specific price agreed upon today (navigate here to find out more). For example, let’s say that Company XYZ is currently trading at $20 a share. Investor MJ decides to invest in Company XYZ but doesn’t think its current price accurately reflects its actual value. So Investor MJ purchases a call option for 100 shares of Company XYZ from Trader AB for an agreed-upon price of $15 a share. In this circumstance, Investor MJ would get the right, but not obligation, to buy 100 shares of Company XYZ from Trader AB at any point before December 31st for $15 per share.

It’s just one example of an option transaction, and there are many more types (like puts ones), but now you should have a basic understanding of what options are. Check out Investopedia’s Strategy Guide To Options Basics for more details.

Now let’s turn our attention to non-listed vs listed options. If you’re planning on participating in the options market, listed vs non-listed options will play a significant role in shaping your strategy.

Non-Listed Options

If you’ve been researching options at all, then you have likely heard of non-listed options. A non-listed option is an over the counter (OTC) derivative traded by phone or email between two parties — this means that there is no “exchange” where these transactions occur. In other words, if you want to buy or sell a non-listed option, then you’ll have to do so via direct communication with another investor. What’s essential about OTC derivatives is that they lack standardization and transparency, meaning that few rules govern their execution and the trading and reporting (to a central exchange) of their prices.

While many non-listed options trade on exchanges, you should understand that the terms listed and non-listed are not synonymous with exchange-traded and OTC derivatives. When we say that an opportunity is “listed,” it simply means that it has been approved for listing on major options exchanges, such as the Chicago Board Options Exchange or Quarterly Options Exchange — this means that its price is publicly available.

Listing Standards

When an options series first gets listed on an exchange, strict listing standards must be met. For instance, all securities included in a particular industry have to have the same rights, preferences, and limitations before being eligible for listing on an exchange. In addition, the issuer of options contracts must meet capitalization, public float, and trading requirements — which ensure that it is of sufficient size to provide liquidity for the option series.

What Is A Listed Option?

A listed option is an options contract (for either a stock or other underlying instrument) that meets specific minimum standards and has met all listing requirements of a particular exchange and thus is freely tradable on that exchange. The terms listed vs non-listed are often used interchangeably with exchange-traded vs OTC derivatives, but this is not entirely accurate as they do not technically mean the same thing. There are two types of listed options: those that trade on exchanges and those that don’t. Listed options are the most common type of options contracts traded through brokers on either national securities exchanges or options exchanges.

Bottom line

As an investor, you should know that non-listed derivatives do not have standardized terms or any central reporting mechanism for their transactions. It also means that no clearing corporation will guarantee, or stand in for, performance between two parties. It is best to avoid non-listed derivatives altogether when trading in the market for these reasons.

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