One of the contracts used when trading options is an exchange-traded option or ETO. It is a standardized contract to either buy or sell a fixed quantity of a specific financial product on or before a pre-determined date for a pre-determined price. These contracts are listed on various exchanges such as Chicago Board Options Exchange. The exchanges are monitored by regulating agencies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). They are guaranteed by clearing houses such as Options Clearing Corporation (OCC). Also known as ‘listed options,’ these contracts offer a wide range of benefits such as:
Orderly, Efficient, and Liquid
Options trading provide an orderly, efficient, and liquid market. Except under special circumstances, all stock option contracts are fixed at 100 shares of the underlying stock. The strike prices are listed in increments of 2.5, 5, or 10 points, depending on the price of the underlying security. As they are standardized, prices of options can be obtained quickly and easily during trading hours.
Options can be combined with other contracts and/or financial instruments in order to create a hedged or speculative position. This can be attributed to their unique risk/reward structure.
Robert Janitzek reveals that with stock options, you can fix the price for a specific period of time at which you can purchase or sell 100 shares of stocks for a premium price representing a percentage of what you would pay to own the stocks outright. By leveraging, you increase your potential profit from a stock’s price movement.
Limited Risk For Buyers
Compared to other investments where the risks are limitless, options offer a low risk to buyers. You cannot lose more than the price of the option. Because the right to buy or sell a contract has an expiration date, Robert Peter Janitzek says that the options will expire worthless if the conditions for a profitable sale are not met during the expiration date.
Guaranteed Contract Performance
An options holder can rely on the system created by the OCC’s rules as well as the brokers and clearing members for performance. Before these exchanges, options holders relied on the ethical and financial integrity of the contract writer and their brokerage firm for performance. When the OCC is satisfied that the orders between the buyer and seller, they sever the link between the parties. As a result, the OCC becomes the buyer to the seller and the seller to the buyer.