What is an option?

An option is a contract that gives the buyer, or holder, what amounts to a ‘first right’ to buy (call) or sell (put) an underlying financial instrument such as common stock. It means that if you own either type of options contract and another investor does not, you have the right to exercise your options and either buy or sell shares at a specified price within a specified time frame. 

The other critical distinguishing feature between buying options and buying stocks is that not every option trades on every market; in other words, there are listed and unlisted options just as there are listed and unlisted stocks. In particular, options traded over-the-counter (OTC), meaning they aren’t listed on the major exchanges, are said to be unlisted.

What is a listed option?

A listed option is an option you can buy/sell over-the-counter in the open market through any commodity futures exchange. i.e., it’s traded in the stock market but not physically settled. Instead, cash settlement is done; let’s discuss this when we go through the terms of listed vs. non-listed options types.

Listing places allows investors to choose to invest by providing them access to investment readily, thus increasing liquidity and hence trading volume. It, in turn, aids price discovery for securities trading, primarily where a more significant number of buyers & sellers exist with deep pockets, etc., mainly large companies list their shares on major exchanges to gain the benefit of listing, thus increasing their perceived value and image in the eyes of investors.

What is a non-listed option?

A Non-Listed Options is an option yet to be listed on any stock exchange though it can be bought or sold over-the-counter through commodity futures exchanges; examples of these options include call/put on currencies etc., which are not traded on major exchanges; however, they are only available on some specific market places.

Non-Listed Options allows individual traders & companies to have access to financial instruments easily at a very reasonable cost with ease of trading, clearing, and settlement processes comparatively faster than listed counterparts, i.e., less process time comparatively helps in reducing costs by saving time & avoiding any last moment risk, etc.

Is there a difference between options and listed options?

Listed Options are tradable assets over-the-counter, readily available marketplaces to trade. In contrast, non-listed options are less liquid and not available with all the trading platforms but very reasonable. It is because companies listing their shares on significant exchanges make it compulsory for them to maintain higher demands in terms of shares or post specific criteria such as average daily volume, several trades, etc. which in turn helps investors remain assured about the company’s financial well being and consequent price discovery process leading to better liquidity & cost-effectiveness both for company and investor.

Listing any asset on an exchange makes it easier for buyers and sellers to find each other and automatically buy/sell to or from each other. In turn, it provides a transparent price with less volatility because of continuous process flow; over-the-counter brokers usually possess the privilege to trade for their clients. Most of these transactions are non-transparent, thus increasing volatility in prices.

What is the difference between listed & unlisted options?

Listed Options have readily available market places to trade, whereas unlisted options may not be available with all the trading platforms but very reasonable due to liquidity reasons; however, both types can be bought or sold over-the-counter.

The listed option has higher liquidity than a non-listed option, allowing buyers and sellers to find each other easily, thus providing a transparent price with less volatility because of the continuous price discovery process. However, unlisted options do not provide that benefit and hence can’t be called as good as listed options.

Check out Saxo Bank if you are interested in options.