Exchange-traded option – what is it?

  As is known, options are a type of security, and all securities can be divided into exchange-traded and over-the-counter. Exchange-traded options are mostly bought by individuals whose main goal is to earn maximum profit through trading without large investments. Over-the-counter options are a more global financial instrument, typically used by large companies. Let’s take a closer look.

Features of Exchange-Traded Options

  Exchange-traded options are standardized securities whose trading is regulated by option or larger stock exchanges. Finding and purchasing exchange-traded options of the required size and terms is much easier, as all offers are concentrated in one place.
  As a rule, the main characteristics of the option are already predefined on the exchange and are standardized. The seller and buyer only agree on the premium, which usually fluctuates based on the current market situation. The strike price also changes.
  In exchange-traded options, both parties to the agreement have a third-party guarantor, which ensures the proper execution of the obligations stated in the contract. In return, the exchange charges a certain fee, usually a percentage of the investment amount. However, in modern practice, there is no direct relationship between the exchange and the investor. A broker acts as an intermediary. The broker pays the fee to the exchange and then includes it in their service charges.
  In the case of large option transactions, the broker’s fee can cost the company a significant portion of its profit. Therefore, when issuing large volumes of options, organizations often sell them directly to other firms or distribute them free of charge to their own employees (issuer options). Such contracts are considered over-the-counter.

Underlying Asset of an Exchange-Traded Option

  Being tied to an exchange is not the only reason an option is called “exchange-traded.” The term “exchange-traded” is also commonly used as a classification of one of the types of options deals.
  There are three types in total: exchange-traded, currency, and commodity. Their names depend on the type of underlying asset, which is the main object of the deal.
  The underlying asset of exchange-traded options can be any type of security, most commonly shares.

Legal Aspects of Exchange-Traded Options

  The circulation of all types of securities is regulated at two levels: national and international.
  In Russia, options are not officially recognized as a separate type of security but are considered a type of conditional purchase agreement. However, this classification does not complicate their regulation, especially within exchanges.
  The activity of stock exchanges in Russia is governed by the Federal Law “On Organized Trading” dated November 21, 2011. It regulates relationships on the stock and currency markets and defines the main requirements for exchanges and their participants.
  Currently, the majority of option trading in Russia is handled by four major exchanges: the Moscow Exchange, the Ural Exchange, the St. Petersburg Currency Exchange, and the St. Petersburg Exchange.
  On the global level, the largest are the London Stock Exchange and the Chicago Board Options Exchange. Together, they account for more than half of global option trading. The term “exchange-traded option” first appeared at the London Exchange, which was the first to include options in its list of tradable securities. This happened in the 1820s; before that, options were traded outside the global financial markets.