Exchange-Traded Option

By AKHILESH GANTI
Updated Mar 2, 2020
What is Exchange-Traded Option?
An exchange-traded option is a standardized derivative contract, traded on an exchange, that
settles through a clearinghouse, and is guaranteed.

Understanding Exchange-Traded Option

An exchange-traded option is a standardized contract to either buy (using a call option), or sell
(using a put option) a set quantity of a specific financial product, on, or before, a pre-determined
date for a pre-determined price (the strike price).

Exchange-traded options contracts are listed on exchanges such as the Chicago Board Options
Exchange (CBOE). The exchanges are overseen by regulators – including the Securities and
Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) – and
are guaranteed by clearinghouses such as the Options Clearing Corporation (OCC).

KEY TAKEAWAYS

 An exchange-traded option is a standardized derivative contract, traded on an exchange,

that settles through a clearinghouse, and is guaranteed.
 Exchange-traded options contracts are listed on exchanges, such as the Chicago Board
Options Exchange (CBOE), and overseen by regulators, like the Securities and Exchange
Commission (SEC).
 A key feature of exchange-traded options that attract investors is that they are guaranteed
by clearinghouses, such as the Options Clearing Corporation (OCC).
Benefits of Exchange-Traded Options
Exchange-traded options, also known as 'listed options', provide many benefits that distinguish
them from over-the-counter (OTC) options. Because exchange-traded options have standardized
strike prices, expiration dates, and deliverables (the number of shares/contracts of the underlying
asset), they attract, and accommodate, larger numbers of traders. OTC options usually tend to
have customized provisions.

This increased volume benefits traders by providing improved liquidity and a reduction in costs.
The more traders there are for a specific options contract, the easier it is for interested buyers to
identify willing sellers, and the narrower the bid-ask spread becomes.

The standardization of exchange-traded options also enables clearinghouses to guarantee that

options contract buyers will be able to exercise their options – and that options contract sellers
will fulfill the obligations they take on when selling options contracts – because the
clearinghouse can match any of a number of options contract buyers with any of a number of
options contract sellers. Clearinghouses can do this more easily because the terms of the
contracts are all the same, making them interchangeable. This feature greatly enhances the
appeal of exchange-traded options, as it mitigates the risk involved in transacting in these types
of securities.

Drawbacks of Exchange-Traded Options

Exchange-traded options do have one significant drawback in that since they are standardized,
the investor cannot tailor them to fit their requirements exactly. Unlike OTC options – which are
not standardized, but are negotiated directly between the buyer and the seller – exchange-traded
options cannot be customized to fit the buyer's or seller's specific goals. However, in most cases,
traders will find exchange-traded options provide a wide enough variety of strike prices and
expiration dates to meet their trading needs.

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Related Terms

Exchange Traded Derivative

An exchange traded derivative is a standardized derivatives contract traded on a
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Flexible Exchange Option (FLEX) Definition
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Listed Option Definition
A listed option is a derivative security traded on a registered exchange with
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Chicago Board Options Exchange (CBOE) Definition
Chicago Board Options Exchange (CBOE), now Cboe Global Markets, is the
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