Option contracts are traded either;
- on a public stock exchange (also known as ETO's (Exchange Traded Options))
- implicity agreed between two parties (also known as OTC's (Over The Counter options)).
The majority of options, however, are traded via public exchange houses and these will be the options discussed throughout this web site. The OTC market is a complicated one, where traders from large institutions can create and trade non-standard option derivatives. They can, for example, add their own special rules such as: if the underlying stock trades as high as x then the contract terminates and the option is then worthless. This is known as a Knockout Option or a Barrier Up and Out Option.
Options are listed and standardized by the stock exchange and are traded by what is known as Serial Months. By standardized, I mean that the specifications that make up the option contracts are set by the stock exchange and cannot be changed.
Here is a snapshot of the August 2005 options for IBM.
The Call options are on the left, while the Put options are listed on the right. Notice the strike prices down the middle? In this case there are 24 contracts available for the public to trade that expire in August 2005. The total number of listed options for IBM at the time of writing (3rd July 2005) are 230. That's 115 call options and 115 put options.
