What are the options?
Options are derivatives of securities, which provide the option buyer with rights to buy or sell an underlying asset at a price on or before a particular date. The right is known as the ‘optionality’, and it derives its value from the market price of that underlying security. There are two types of options – calls and puts.
A call option gives the owner the right to buy an asset at a predetermined price called exercise price (exercise/strike price) during a fixed period. In contrast, options give owners the right but not the obligation to sell assets at predetermined prices within specific timeframes.
When do people trade options?
People generally buy or write /sell options when they think there is an imbalance in the market. For instance, more buyers than sellers of the underlying instrument will buy call options to benefit from this condition. On the other hand, if there are more sellers than buyers of an underlying asset, people will write options to earn premiums.
What are OTC options?
OTC stands for ‘over-the-counter’, implying that it is traded directly between two parties without passing through a stock exchange or centralized trading facility/system
OTC Options were developed because not all securities and derivatives require regular exchange trading, such as stocks and currencies.. Etc
How do listed options differ from OTC options in Singapore?
OTC options are privately negotiated over the counter between two parties, whereas listed options trade on the exchange and can be bought or sold by anyone trading in that market. Additionally, OTC options do not have standardized terms/features such as expiry period, exercise style etc., like Listed Options.
Listed vs Over-The-Counter (OTC) Options
Listing shares give investors more transparency and ensure a fair price is set because it will be based on market activity. In contrast, OTC trades lack transparency and may not necessarily ensure a fair value for both parties. Etc.
What happens when you buy/sell OTC?
There is currently no feasible way to track what happened to these contracts in Singapore as they were never listed on an exchange, and their details vary from contract to contract.
What is the future of OTC?
The futures market has multiplied with higher volumes than many other asset classes and is now significantly more significant than the cash and equity markets. With this level of growth, it is unlikely that people will stick to using OTC options instead of exchange-listed contracts as they provide greater transparency. Etc
What are the advantages of Listed Options over OTC Options?
OTC options (over-the-counter) might be better suited for more sophisticated investors who want a customized derivative product. In contrast, listed derivatives such as stocks, indices, and Forex pairs can be entirely traded by anyone – including novice traders. Additionally, listed derivatives can be used as risk management tools. In contrast, OTC options do not currently provide this feature, and their non-standardized terms make it difficult to estimate the potential loss or gain you might make from their use.
Are Listed Options better than OTC options?
Typically, derivative contracts such as Listed Options are more attractive to novice investors who want an easy way to trade and don’t require customization. Most listed options, such as stock index futures, commodity futures etc., can even be bought by retail punters. It makes them a good choice for those looking to try out derivative trading without spending large amounts of capital on customized OTC products. However, there is also a range of OTC options specifically designed for sophisticated investors. They include features such as the ability to short an underlying product or track the price movement through a customized index.
In conclusion
Although there is currently no way for Singaporeans to trade OTC products, these contracts still provide a helpful service by catering to more sophisticated traders and businesses who require more customized derivatives. On the other hand, Listed options offer greater transparency and accessibility, making them easier for novice participants to use and a great way to start trading options in Singapore.
