How do listed options differ from OTC options?

Listed Options

Many companies will not admit to using listed options because of the extra administrative overhead. Companies like Saxo that use listed options generally have a large number of shareholders and a relatively high volume of shares changing hands daily. Visit their website.

In this case, it is usually advantageous for the company to employ listed options rather than over-the-counter (OTC) options. This is because OTC options face greater counterparty risk and legal costs in addition to increased administration costs.

Listing an option contract also provides investors with specific legal remedies that OTC options do not provide.

OTC Options

Over-the-counter (OTC) options are negotiated directly between two parties and usually take place on the phone. There is no centralised counterparty to either party like there would be in a listed options contract.

Additionally, most OTC contracts involve higher transaction costs because each party’s broker charges separately for the transaction – whereas listed options charge a flat fee per contract traded.

Because of these disadvantages, many brokers have stopped offering OTC option facilities altogether since it is more profitable for them to deal in listed options.

Despite the negative connotation associated with OTC options, they are not inherently wrong. Some types of OTC options can be even more advantageous than their listed counterparts depending on the situation that companies find themselves in.

For example, control transactions by controlling shareholders are usually conducted using OTC options because it saves costs and maximize flexibility.

OTC options are traded through a dealer network in an unregulated market, and they do not have standardised terms.

On the other hand, Listed options trade in a regulated environment and offer standardised contract terms and features.

One of the most glaring differences between listed and OTC is that listed has standardised contracts with defined specifications that you can view easily online.

 A key reason for this difference is that listed options attract more institutional investors than over-the-counter (OTC) contracts because of their accessibility to retail traders.

This means there is less room for misrepresentation by brokers when dealing with such large numbers of investors who employ different types of strategies.

Listing requirements vary depending on the market; however, listing requirements typically require having at least one market maker willing to make a two-sided marketplace.

Requirements for Hong Kong

  • The contract size cannot be less than HK$100,000 or more than HK$12,000,000
  • Each transaction must involve at least two months tenure OR an average of 21 days per month.
  • An issuer must have more than 12 months trading history on its securities and earnings before interest taxes, depreciation and amortisation (EBITDA) of at least HK$10 million for the last 12 months before filing for listing application formalities.

OTC options lack this standardisation of terms which makes it difficult for retail traders to trade due to the lack of clarity on what kind of options are being bought and sold

The terms also need to be agreed upon between buyer and seller, which means every trade is unique, resulting in some losses for traders unfamiliar with OTC markets.

Another disadvantage of OTC options trading is that the buyer’s broker needs to have a certain amount of money on hand to ensure they can pay if their client decides to exercise their option when it expires.

This arrangement usually requires only major players such as large banks or financial institutions because they have deep pockets and many clients, giving them an edge over other brokers. It also limits the available market pool because individual investors cannot buy these options due to limited funding capabilities.

OTC options are usually not listed on any public exchange, which means you can trade them at any time between the party who is buying and selling.

An alternative to buying OTC options would be to buy a listed put or call option from another much easier company. Still, it will typically have a much larger premium than if trading exclusively in OTC markets.