What is Listed Option?
395 reads · Last updated: December 5, 2024
An exchange-traded option is a standardized derivative contract, traded on an exchange, that settles through a clearinghouse and is guaranteed.
Definition
Listed options are standardized derivative contracts traded on exchanges. These contracts are settled through clearinghouses and are guaranteed by the exchange. Listed options provide investors with the right, but not the obligation, to buy or sell the underlying asset at a predetermined price at a specific future date.
Origin
The history of options can be traced back to ancient Greece, but the modern options market began with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. This marked the standardization and institutionalization of options trading, making options a widely used financial instrument.
Categories and Features
Listed options are primarily divided into call options and put options. Call options give the holder the right to purchase the underlying asset at a specific price in the future, while put options give the holder the right to sell the underlying asset at a specific price in the future. The standardized features of listed options include contract size, expiration date, and strike price, which facilitate easy trading and settlement on exchanges.
Case Studies
A typical case is the stock options of Apple Inc. Investors can purchase call options on Apple to lock in a future purchase price, allowing them to profit if the stock price rises. Another example is the put options on Tesla Inc., where investors can buy put options to hedge against the downside risk of holding Tesla stock.
Common Issues
Common issues investors face when using listed options include misunderstandings of option pricing models, such as the Black-Scholes model, and misjudgments of the leverage effect of options. Investors should understand the risks and potential losses associated with options, especially during periods of high market volatility.
