http://www.options-trading-education.com/7047/trading-options-over-the-counter/
Trading Options over the Counter
Trading options over the counter can be quite profitable. Trading options over the counter also entails risks not seen in standardized options trading. Traders buy options to hedge risk and traders buy and sell options on speculation in search of profits. Both can be reasons for trading options over the counter. Over the counter options are agreements between two trading parties. They are not standardized and there is not secondary market. The contract or strike price is set by the persons involved as are contract expiration dates. The most important and potentially dangerous aspect of trading options over the counter is that there is not a clearing house to provide guarantees of contract performance. This is to say there is significant counterparty risk in over the counter options trading.
Just Like Standardized Trading and Not
Just like trading standardized options, one can buy or sell calls or puts or both when trading options over the counter. Purchasing a call gives the buyer the right to purchase the underlying equity at an agreed upon price. This right persists no matter how high the market price (called the spot price) of the equity may go up. Buying a put gives the buyer the right to sell an underlying equity at an agreed upon price no matter how far the equity it might fall. In no case is the buyer obligated to execute a contract, and he will only do so if it is profitable. On the other hand the sell or a call or put contract is paid for taking a risk. If the price of the equity underlying the options contract performs contrary to expectations the seller can lose significant amounts of money. Here is where the difference between trading options over the counter and trading standardized contracts is important. In standardized options trading there is a secondary market and traders can exit a contract by executing the opposite trade. This is difficult if not impossible in over the counter options trading.
Available Options over the Counter
Because trading options over the counter involved an agreement between two parties, one can trade options on commodities, bonds, stocks, real estate, or various derivatives. Traders agree upon an acceptable expiration date, strike price, and price of the options contract. In addition, settlement terms can be arranged according to the wishes of the two parties and can vary widely.
Inherent Difficulties in Trading Options over the Counter
2. Trading options over the
counter can be quite
profitable.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
3. Trading options over the
counter also entails risks not
seen in standardized options
trading.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
4. Traders buy options to hedge
risk and traders buy and sell
options on speculation in
search of profits.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
5. Both can be reasons for
trading options over the
counter.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
6. Over the counter options are
agreements between two
trading parties.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
7. They are not standardized
and there is not secondary
market.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
8. The contract or strike price is
set by the persons involved
as are contract expiration
dates.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
9. The most important and
potentially dangerous aspect
of trading options over the
counter is that there is not a
clearing house to provide
guarantees of contract
performance.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
10. This is to say there is
significant counterparty risk
in over the counter options
trading.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
11. Just Like Standardized
Trading and Not
http://www.options-trading-education.com/7047/trading-options-over-the-counter
12. Just like trading standardized
options, one can buy or sell
calls or puts or both when
trading options over the
counter.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
13. Purchasing a call gives the
buyer the right to purchase
the underlying equity at an
agreed upon price.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
14. This right persists no matter
how high the market price
(called the spot price) of the
equity may go up.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
15. Buying a put gives the buyer
the right to sell an underlying
equity at an agreed upon
price no matter how far the
equity it might fall.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
16. In no case is the buyer
obligated to execute a
contract, and he will only do
so if it is profitable.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
17. On the other hand the sell or
a call or put contract is paid
for taking a risk.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
18. If the price of the equity
underlying the options
contract performs contrary to
expectations the seller can
lose significant amounts of
money.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
19. Here is where the difference
between trading options over
the counter and trading
standardized contracts is
important.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
20. In standardized options
trading there is a secondary
market and traders can exit a
contract by executing the
opposite trade.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
21. This is difficult if not
impossible in over the
counter options trading.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
22. Available Options over the
Counter
http://www.options-trading-education.com/7047/trading-options-over-the-counter
23. Because trading options over
the counter involved an
agreement between two
parties, one can trade options
on
commodities, bonds, stocks,
real estate, or various
derivatives.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
24. Traders agree upon an
acceptable expiration
date, strike price, and price of
the options contract.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
25. In addition, settlement terms
can be arranged according to
the wishes of the two parties
and can vary widely.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
26. Inherent Difficulties in Trading
Options over the Counter
http://www.options-trading-education.com/7047/trading-options-over-the-counter
27. Traders commonly rely on
technical analysis tools to
assess market sentiment.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
28. These tools work best in
fluid, high volume, and
continuous markets.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
29. Technical analysis tools may
or may not be of use when
trading options over the
counter.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
30. Traders may simply need to
rely on fundamentals in
assessing potential trades.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
31. As mentioned above there is
no clearing house for over the
counter trades so, if one party
reneges on its obligation
there can be problems.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
32. It is wise to specify terms for
resolution of a contract if one
party does not pay as it may
require lawyers and going to
court.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
33. Although basic options
strategies apply, all of the
more profitable options
strategies in the world may be
of little use if you expect
http://www.options-trading-education.com/7047/trading-options-over-the-counter
34. to gain a large amount on a
well-chosen options contract
and the other party does not
abide by the contract.
http://www.options-trading-education.com/7047/trading-options-over-the-counter
