The Benefits of Listed Options
Len Yates

Individual retail traders are most likely to trade "listed" options, also called exchange-traded options.  These are standardized option contracts that are traded on exchanges.  Listed options are available on many stocks, ETFs, indexes, bond futures, commodity futures, and currency futures.  There are even options on things like interest rates, inflation rates, and the weather.  The benefits to exchange-traded options are standardized contracts, liquidity, quick access to prices, and the use of clearing houses by exchanges. 

Each listed option is standardized for the same quantity of the underlying asset.  In the U.S., for example, one stock option is based on 100 shares of an underlying stock, and one futures option is based on one futures contract.  Options come in two varieties, calls and puts, and you can buy or sell either type.  You make those choices - whether to buy or sell and whether to choose a call or a put - based on what you want to achieve. 

For both calls and puts, several strike prices are usually available at regular price intervals.  There are also several different durations (expiration dates) available, following a set pattern.  In stocks, for example, one set of options expires in 30 days or less, another set of options expires in approximately 31 – 60 days, another set expires in approximately 3 – 6 months, and so on, going out as far as 2 years or more.

By standardizing options contracts, the exchanges make them useful to a large group of investors.  This is what allows a liquid market with frequent trading to exist.  Since the markets are constantly moving, options prices are continuously quoted and changing.

Market makers at the options exchanges are always publicly posting prices at which they are willing to buy and sell each option.  They stand ready to take the other side of your trade, and thus "make a market" in the options they are responsible for.  Once an order is received, the market maker seeks an offsetting order or immediately fills the order from its own inventory.  This process takes place in mere seconds, and allows both option holders and option writers to open and close options positions at any time.

The use of a clearing house, such as the Options Clearing Corporation, means you do not need to worry about the trustworthiness of the other party to the transaction.  Clearing houses stand in the middle of all futures and options contracts, acting as the buyer to every seller and a seller to every buyer.  They guarantee both sides of the transaction.

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