A market for options exists, similar to the market for stocks, in which options are bought and sold between investors.
Some options, known as listed options, are bought and sold on exchanges such as the Chicago Board Options Exchange. The Chicago Boards Options Exchange is to options what the New York Stock Exchange is to stocks.
Trading options opens many new opportunities in your investing world. Options could give you a new stream of income, ways to diversify your portfolio and strategies to hedge against losses. However, options are very risky and can lead to losses.
In this article, we will help you gain a basic understanding of the market for options so you are aware of your investing possibilities.
The Chicago Board Options Exchange, or CBOE, was founded in 1973 and is the world’s largest options market. The CBOE is a regulated platform that investors can use to buy and sell listed options. Listed options are also found on exchanges such as the NYSE Amex, NYSE ARCA, and NASDAQ /OMX PHLX.
Listed options have standardized strike prices, expiration dates, settlement services and clearings that are set by the exchanges. The exchanges basically act as the middlemen between the buyer and seller of the option.
Usually, an option’s strike price for most underlying stocks and ETFs is set in $1 intervals with higher priced underlying stocks having a strike price set in $5 or $10 intervals. Expiration dates are normally the third Friday of the option contract’s month, unless it is a holiday. Such a conflict with a holiday would cause the expiration date to move up one day to the Thursday immediately before the third Friday.
Differing from listed options are specialized options, which are traded over-the-counter between large institutions. The terms and conditions of these option contracts are defined only by the buyer and seller. Traded over-the-counter means that these options are not listed on an options exchange such as the Chicago Board Options Exchange. Generally, investors with less capital focus only on listed options.
There is a difference between American-listed options and European-listed options. American options can be exercised anytime between the purchase of the option and the expiration date; European options can only be exercised on the expiration date. American options make up most of the listed exchange-traded options, but it is important to remember the key difference between American and European options.
These are just some basic rules and ideas to keep in mind when thinking about the market for options. Options trading is a great opportunity for you as an investor as long as you are aware of the risks involved and manage them appropriately.
