By www.Options-Trading-Education.com
Over the Counter Options
Traders looking to buy options to hedge risk or simply speculate in the options market may consider over the counter options. Over the counter options are not traded on an options exchange and are essentially contracts between two parties. There is no secondary market for such vehicles. Strike prices are not standardized nor are expiration dates. Traders may find great opportunities in over the counter options but will need to be aware of the counter party risk involved. In other words, in over the counter options trading there is no clearing house to guarantee that both parties will abide by the terms of the options contract.
Options Trading
Over the counter trading works much like standardized options trading in that traders buy or sell puts and calls on an underlying equity. Buying a call gives the trader the right to purchase the equity in question at a set price on or before the expiration date of the options contract. Buying a put gives the trader the right to sell the equity in question at a set price on or before the expiration of the options contract. Sellers seek to profit from selling calls and puts but assume the risk of loss in the agreement in return for a payment by the buyer.
What Can I Trade in Over the Counter Options?
One can trade stocks, bonds, commodities or derivatives over the counter. Trading over the counter does not in any way limit the range of options trading. Any options agreement between two parties is possible. Options over the counter use calls and puts just like standardized options trading. However, expiration dates can be whenever the two parties wish them to be. The strike price of a non-standard option can also be subject to negotiation. Likewise the terms of settlement may vary by contract.
What Are the Risks of Over the Counter Options Trading?
The major risk of over the counter options trading is counterparty risk. Those wishing to trade non-standard options may wish to look closely at the exact wording of the options contract and consider a third party insurer to guarantee again the other party not fulfilling their contract obligations. Traders may choose to go over the counter in order to trade options on an equity when the same opportunity does not exist in standardized options trading. A risk inherent in trading over the counter options is that there is not a large market which, by its nature, tends to result in fair and liquid pricing. Traders may pick up great deals in the over the counter options market and they can get badly stung. Some of the more profitable options strategies using technical trading techniques will not be available in a non-liquid market.
Why Engage in Over the Counter Options Trading?
By going over the counter two interested parties can trade options on virtually any equity that they wish. These can include penny stocks, for example.
2. Traders looking to buy options to
hedge risk or simply speculate in the
options market may consider over
the counter options.
By www.Options-Trading-Education.com
3. Over the counter options are not
traded on an options exchange and
are essentially contracts between
two parties.
By www.Options-Trading-Education.com
4. There is no secondary market for
such vehicles.
By www.Options-Trading-Education.com
5. Strike prices are not standardized
nor are expiration dates.
By www.Options-Trading-Education.com
6. Traders may find great opportunities
in over the counter options but will
need to be aware of the counter
party risk involved.
By www.Options-Trading-Education.com
7. In other words, in over the counter
options trading there is no clearing
house to guarantee that both parties
will abide by the terms of the
options contract.
By www.Options-Trading-Education.com
9. Over the counter trading works
much like standardized options
trading in that traders buy or sell
puts and calls on an underlying
equity.
By www.Options-Trading-Education.com
10. Buying a call gives the trader the
right to purchase the equity in
question at a set price on or before
the expiration date of the options
contract.
By www.Options-Trading-Education.com
11. Buying a put gives the trader the
right to sell the equity in question at
a set price on or before the
expiration of the options contract.
By www.Options-Trading-Education.com
12. Sellers seek to profit from selling
calls and puts but assume the risk of
loss in the agreement in return for a
payment by the buyer.
By www.Options-Trading-Education.com
14. One can trade
stocks, bonds, commodities or
derivatives over the counter.
By www.Options-Trading-Education.com
15. Trading over the counter does not in
any way limit the range of options
trading.
Any options agreement between two
parties is possible.
By www.Options-Trading-Education.com
16. Options over the counter use calls
and puts just like standardized
options trading.
By www.Options-Trading-Education.com
17. Options over the counter use calls
and puts just.
However, expiration dates can be
whenever the two parties wish them
to be standardized options trading.
By www.Options-Trading-Education.com
18. The strike price of a non-standard
option can also be subject to
negotiation.
By www.Options-Trading-Education.com
19. Likewise the terms of settlement
may vary by contract.
By www.Options-Trading-Education.com
21. The major risk of over the counter
options trading is counterparty risk.
By www.Options-Trading-Education.com
22. Those wishing to trade non-standard
options may wish to look closely at
the exact wording of the options
contract and consider a third party
insurer to guarantee again the other
party not fulfilling their contract
obligations.
By www.Options-Trading-Education.com
23. Traders may choose to go over the
counter in order to trade options on
an equity when the same
opportunity does not exist in
standardized options trading.
By www.Options-Trading-Education.com
24. A risk inherent in trading over the
counter options is that there is not a
large market which, by its
nature, tends to result in fair and
liquid pricing.
By www.Options-Trading-Education.com
25. Traders may pick up great deals in
the over the counter options market
and they can get badly stung.
By www.Options-Trading-Education.com
26. Some of the more profitable options
strategies using technical trading
techniques will not be available in a
non-liquid market.
By www.Options-Trading-Education.com
28. By going over the counter two
interested parties can trade options
on virtually any equity that they
wish.
By www.Options-Trading-Education.com
29. These can include penny stocks, for
example. Individuals engaged in a
business transaction may choose to
develop an options contract that
helps one or both hedge the risk of
the transaction.
By www.Options-Trading-Education.com
30. Traders can include language in the
options contract which gives them
assurance that the other party will
be able to fulfill his or her contract
obligations.
By www.Options-Trading-Education.com
31. However, without a counterparty
insurer one party may need to take
the other to court in order to collect.
By www.Options-Trading-Education.com
32. For insights and useful information
about options and options trading
visit
www.Options-Trading-Education.com.
