Options Market, Options Markets

By: EconomyWatch   Date: 23 November 2010

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The exchange where most of the buying and selling of options contracts take place is called the options market. The most common way of trading options is through standardized options contracts. These are listed in various futures and options exchanges. The listing of the contracts and their respective prices is done using ticker symbols.

These exchanges publish the options prices continuously and create live options markets for options trading. Thus, the exchange offers the trading parties a platform to discover prices and execute transactions. These exchanges assume the role of intermediaries for buyers and sellers.

The Role of an Option Market

These exchanges ensure that the contract terms are backed by the credit of the exchange. They also safeguard the anonymity of the counterparties and enforce market regulations to ensure that the trades remain fair and transparent. During fast trading conditions, these exchanges ensure the maintenance of orderly markets.

Options Market and Over the Counter Options

In addition to exchange traded options, there are options that are not traded on any stock exchange. Such options are known as over-the-counter (OTC) options. The OTC options contracts are agreed upon between two independent parties. Usually, one party is a well-capitalized institution.

Avoiding the exchanges enables traders of OTC options to tailor the terms of the trade. These transactions are not usually advertised in the market. They also face little regulatory requirements. Still, it is obligatory for the over-the-counter counterparties to establish credit lines and conform to clearing and settlement procedures.

Basic Trades of an Options Market

  • Long call: When a trader believes that the price of a stock would appreciate, he/she can acquire the right to buy an option rather than just opting to purchase the stock. If the price of the stock moves above the exercise price by more than the premium, the trader earns a profit.
  • Long put: In case the trader believes that the price of the share will decrease, he/she can buy the right to sell.
  • Short call: A trader expecting a share price to decline can sell a call. The trader will then be obligated to sell the stock to the call buyer.
  • Short put: A trader expecting a share price to appreciate can sell a put. This will give the trader an obligation to buy the stock from the put buyer.

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