Definition
A listed option is a financial derivative in the form of a put or call option that is authorized and regulated by an exchange for trading. It is typically characterized by standardized terms, including expiration date, strike price, and contract size, which enhance liquidity and ensure consistent trade execution.
Types of Listed Options
- Call Option: Gives the holder the right, but not the obligation, to buy the underlying asset at a specified strike price within a set time frame.
- Put Option: Grants the holder the right, but not the obligation, to sell the underlying asset at a specified strike price within a specified period.
Examples
- Stock Options: Options on individual stocks such as Apple Inc. (AAPL) or Microsoft Corporation (MSFT).
- Index Options: Options based on stock indices like the S&P 500 or the NASDAQ-100.
- Commodity Options: Options on commodities such as gold, oil, or agricultural products.
- Currency Options: Options on currency pairs like EUR/USD or GBP/USD.
Frequently Asked Questions
What are the benefits of trading listed options?
Listed options offer transparency, liquidity, and standardized contracts, making them easier to trade and allowing for a wide range of strategies.
How are listed options regulated?
Listed options are regulated by the exchange where they are traded (e.g., CBOE, NYSE) and are subject to oversight by federal agencies like the Securities and Exchange Commission (SEC) in the United States.
What are the key features of a listed option?
Standardized terms including the expiration date, strike price, and contract size. They also involve mechanisms for settlement and margin requirements.
Can listed options be traded on margin?
Yes, listed options can often be traded on margin, allowing traders to leverage their positions, subject to the margin requirements set by the exchange.
How are listed options different from Over-The-Counter (OTC) options?
Listed options are standardized and traded on exchanges, whereas OTC options are customizable and traded between private parties outside of exchanges.
Related Terms with Definitions
- Strike Price: The set price at which the holder of the option can buy (call option) or sell (put option) the underlying asset.
- Expiration Date: The date at which the option contract expires and ceases to exist.
- Underlying Asset: The financial asset (e.g., stock, commodity, index) on which the option is based.
- Premium: The price paid for purchasing an option contract.
- Exercise: The action of implementing the right to buy or sell the underlying asset at the strike price.
Online References
Suggested Books for Further Studies
- “Options, Futures, and Other Derivatives” by John C. Hull
- “Options as a Strategic Investment” by Lawrence G. McMillan
- “Option Volatility and Pricing: Advanced Trading Strategies and Techniques” by Sheldon Natenberg
- “The Options Playbook: Featuring 40 Strategies for Bulls, Bears, and Even Butterflies” by Brian Overby
Fundamentals of Listed Options: Finance Basics Quiz
### What is a listed option?
- [ ] A negotiated agreement to trade a security.
- [x] An authorized put or call option traded on an exchange.
- [ ] A market order for buying stocks.
- [ ] A private agreement between two parties.
> **Explanation:** A listed option is an option that has been authorized for trading on an exchange and features standardized terms and regulations.
### What rights does a call option grant?
- [ ] The right to sell the asset.
- [x] The right to buy the asset.
- [ ] The right to hold the asset forever.
- [ ] The right to lease the asset.
> **Explanation:** A call option grants the holder the right to buy the underlying asset at a specified strike price within a set time frame.
### What are the two primary types of listed options?
- [x] Call and Put options
- [ ] Market and Limit options
- [ ] Stocks and Bonds options
- [ ] Cash and Margin options
> **Explanation:** The two primary types of listed options are call options and put options.
### Which organization typically regulates listed options in the US?
- [ ] Internal Revenue Service (IRS)
- [ ] Federal Reserve
- [x] Securities and Exchange Commission (SEC)
- [ ] Department of the Treasury
> **Explanation:** In the United States, the Securities and Exchange Commission (SEC) typically regulates listed options.
### What is the term for the price paid to purchase an option contract?
- [x] Premium
- [ ] Discount
- [ ] Interest
- [ ] Commission
> **Explanation:** The price paid to purchase an option contract is called the premium.
### How are listed options different from OTC options?
- [ ] Listed options are more expensive.
- [ ] OTC options are traded on major exchanges.
- [x] Listed options are standardized and regulated by exchanges.
- [ ] Listed options cannot be traded after the market closes.
> **Explanation:** Listed options are standardized and regulated by exchanges, unlike OTC options, which are customizable and traded between private parties.
### What is a strike price?
- [ ] The amount paid to buy an option.
- [ ] The market value of the option contract.
- [x] The set price for buying or selling the underlying asset.
- [ ] The profit gained from trading the option.
> **Explanation:** The strike price is the predetermined price at which the holder of an option can buy or sell the underlying asset.
### Can listed options be traded on margin?
- [x] Yes
- [ ] No
> **Explanation:** Listed options can often be traded on margin, subject to the regulation and margin requirements set by the exchange.
### What occurs when an option is exercised?
- [ ] The contract is voided without any transactions.
- [x] The holder buys or sells the underlying asset at the strike price.
- [ ] The option is transferred to another party.
- [ ] Reinforcements enter the market.
> **Explanation:** When an option is exercised, the holder buys (for a call option) or sells (for a put option) the underlying asset at the strike price.
### What is an underlying asset in the context of options?
- [ ] The overall value of the option contract.
- [ ] The strike price associated with the option.
- [x] The financial asset upon which the option is based.
- [ ] The premium paid for the option contract.
> **Explanation:** The underlying asset is the financial asset (such as a stock, commodity, or index) on which the option is based.
Thank you for exploring the intricacies of listed options and accurately responding to our engaging sample exam questions. Keep learning to excel in your financial pursuits!
