When it comes to options trading, there are two main types of options: listed and OTC. OTC refers to over the counter, meaning that trades are transacted directly between the buyer and seller. It is much more common to have listed options in Australia due to the many exchanges supporting this option.
What Are the Differences?
Where They Are Traded
Listed options are traded on a regulated exchange, such as the Australian Securities Exchange (ASX). They are standardized, meaning that the exchange sets the terms and conditions of each option. It includes the expiration date, strike price, and payout. Listed options offer greater liquidity and transparency than OTC options.
OTC options are not standardized, meaning that the buyer and the seller set the terms and conditions of each option. These options are usually traded over the phone or in-person rather than through an electronic exchange.
The liquidity of an option is the ability to purchase or sell an option in the market when needed. The greater the liquidity in that market, the easier it will be for you to buy or sell an option. The greater the liquidity, the lower the market impact cost will be.
Market impact cost is the cost of executing a trade due to the change in price and volume around that trade.’ If an options market is not very liquid, it may be difficult to execute your trade. This higher cost can eat into potential profits, so it is essential to keep track of the liquidity of options markets.
Listed options have much higher liquidity than OTC options because they are traded on an exchange. It means that you can buy and sell them more efficiently and at a better price.
OTC options are not as liquid as listed options, which means they can be harder to trade and may have a wider bid-ask spread. It means that you may not get the best price when trading OTC options.
The liquidity and standardization of listed options make them the preferred option for professional traders. OTC options might be better for casual traders as they offer more flexibility.
Another difference between listed and OTC options is regulation. Listed options are regulated by the ASX (Australian Securities Exchange), while OTC options are not regulated. This means that listed options must meet specific standards, while OTC options do not. These standards include things such as the financial position of the broker, trading procedures, and reporting requirements. The valuation of an option is also stricter for listed options, as the ASX wants to protect investors.
It is important to note that listed options are not traded on every exchange. The ASX is one of a few exchanges that offer listed options. If you are looking for a more global options market, you should consider trading OTC options.
If you are looking for more liquidity and transparency in your options trading, listed options are likely the best choice for you. However, if you are looking for more flexibility in your options or want to trade with a smaller broker, OTC options might be better.
Differences in tax implications should also be considered when making your decision. Listed options tend to be less complex in terms of tax than OTC options. This means that you will not need to pay as much tax when trading listed options.
Processing of Trades
Processing of options trades can also differ depending on the type of option. Your trade will be processed automatically when the exchange receives it with listed options. With OTC options, the exchange will process your trade manually. It could lead to a setback in getting your order filled.
Depending on your risk appetite and investment goals, one type of option may be better suited than the other. So, it is crucial to understand the difference between listed and OTC options before deciding which is suitable for you. Research and proper strategy are fundamental when trading options, no matter which type you use. Another option is to consider forex trading. Read a bit more about how traders use Bollinger bands in this market.