Trading Options over the Counter

By www.Options-Trading-Education.com

Trading options over the
counter can be quite
profitable.

http://www.options-trading-education.com/7047/trading-options-over-the-counter

Trading options over the
counter also entails risks not
seen in standardized options
trading.


Traders buy options to hedge
risk and traders buy and sell
options on speculation in
search of profits.


Both can be reasons for
trading options over the
counter.


Over the counter options are
agreements between two
trading parties.


They are not standardized
and there is not secondary
market.


The contract or strike price is
set by the persons involved
as are contract expiration
dates.


The most important and
potentially dangerous aspect
of trading options over the
counter is that there is not a
clearing house to provide
guarantees of contract
performance.


This is to say there is
significant counterparty risk
in over the counter options
trading.


Just Like Standardized
Trading and Not


Just like trading standardized
options, one can buy or sell
calls or puts or both when
counter.


Purchasing a call gives the
buyer the right to purchase
the underlying equity at an
agreed upon price.


This right persists no matter
how high the market price
(called the spot price) of the
equity may go up.


Buying a put gives the buyer
the right to sell an underlying
equity at an agreed upon
price no matter how far the
equity it might fall.


In no case is the buyer
obligated to execute a
contract, and he will only do
so if it is profitable.


On the other hand the sell or
a call or put contract is paid
for taking a risk.


If the price of the equity
underlying the options
contract performs contrary to
expectations the seller can
lose significant amounts of
money.


Here is where the difference
between trading options over
the counter and trading
standardized contracts is
important.


In standardized options
trading there is a secondary
market and traders can exit a
contract by executing the
opposite trade.


This is difficult if not
impossible in over the
counter options trading.


Available Options over the
Counter


Because trading options over
the counter involved an
agreement between two
parties, one can trade options
on
commodities, bonds, stocks,
real estate, or various
derivatives.


Traders agree upon an
acceptable expiration
date, strike price, and price of
the options contract.


In addition, settlement terms
can be arranged according to
the wishes of the two parties
and can vary widely.


Inherent Difficulties in Trading
Options over the Counter


Traders commonly rely on
technical analysis tools to
assess market sentiment.


These tools work best in
fluid, high volume, and
continuous markets.


Technical analysis tools may
or may not be of use when
counter.


Traders may simply need to
rely on fundamentals in
assessing potential trades.


As mentioned above there is
no clearing house for over the
counter trades so, if one party
reneges on its obligation
there can be problems.


It is wise to specify terms for
resolution of a contract if one
party does not pay as it may
require lawyers and going to
court.


Although basic options
strategies apply, all of the
more profitable options
strategies in the world may be
of little use if you expect


to gain a large amount on a
well-chosen options contract
and the other party does not
abide by the contract.


Trading Options over the Counter

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Trading Options over the Counter