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Options are traded on many of the major securities
exchanges (listed options), as well as over the counter market.
Most individual stock options, stock index options, and futures options
trade on one of the major exchanges, such as the Chicago Options Exchange
or the New York Futures Exchange and so on. Listed options are traded the
same way listed stocks are traded.
Each option has a bid price and an asked price, which are determined by
the same factors that determine the bid and asked of any securities - supply
The trading takes place at a trading post, and each option has a specialist
assigned to provide liquidity and to maintain an orderly market.
The premiums have minimum price moves. For example, individual stock options
have the minimum premium move of 1/8 point ($12.50). Other types of options
have other minimum price moves.
All trades are settleed through the listed Options Clearing Corporation
(OCC). By acting as an intermediary between buyers and sellers, the OCC
in effect guarantees to each party that the options will be honored and
that obligations incurred by all parties to options transactions will be
Listed strike prices are set at 2 1/2 point increments (of a$100) if the
price of the stock is less than $25. Strike prices are set at 5-point increments
if the price of the underlying stock is between $25 and $200 per share.
For the prices currently over $200 per share, strike prices are set at
10-point increments. For example, if the price of the underlying stock
is currently $15, the option strike prices are $10.00, $12.50, $15.00,
$17.50 and so on.
Over The Counter Options
Over the counter options trade primarily on currencies and on individual
bonds. Each of these options contracts is the direct result of negotiations
between the buyer and the seller. They can agree on any strike price, any
expiration date, and any premium that is mutually aggreable. Hence the
advantage of OTC options is that the contract can be customized to meet
the individual needs of the option's buyer and seller. The disadvantages
Getting accurate price information is very difficult and therefore, the
possibility exists for either the buyer to overpay for the option or the
seller to undersell it.
The options, once purchased, are very hard to resell becasue no ready market
exists. While listed options are generally very liquid, OTC options are
There is no clearing house to guarantee OTC option transaction so
there is a credit risk here.
Main Page | Table of Contents | Corporate
This page is created by Julia
Lee '99 and is maintained by Professor
Satyananda Gabriel of the Economics Department, Mount
Holyoke College, January 1999.