In short, yes, there is a difference between options and listed options in Sydney. An option is a contract that gives the holder the right, but not the duty, to trade an asset at a specified price by a specific date.
In contrast, a listed option is an option that is traded on a regulated exchange. The key difference between options and listed options is that options are contracts between two parties, while listed options are traded on an exchange. You can trade both options and listed options through Saxo Bank.
Table of Contents
The price
One of the most significant differences between options and listed options is the price. Options are typically priced using a model, such as the Black Scholes model. The price of a listed option, on the other hand, is determined by supply and demand.
Exercise
Another key difference between options and listed options is exercise. With an option, the holder has the right but not the obligation to exercise the contract. In contrast, the holder must exercise the contract with a listed option if they wish to buy or sell the underlying asset.
Liquidity
Liquidity is another crucial difference between options and listed options. Options are typically less liquid than listed options because there are only two parties to an option contract, while there are many market participants in a listed options market.
Standardization
Options are not standardized, which is one of the key differences between options and listed options. On the other hand, listed options are standardized contracts that are traded on an exchange.
Margin
Margin is another critical difference between options and listed options. Traders typically have to post 100% of the contract value as margin when trading options because options are considered high-risk instruments. In contrast, traders only have to post a small percentage of the contract value as margin when trading listed options.
Settlement
Another vital difference between options and listed options is the settlement. With an option, you can settle the contract in cash or the underlying asset. With a listed option, the contract is permanently settled in cash.
Regulation
The final key difference between options and listed options is regulation. Any government agency does not regulate options. On the other hand, listed options are regulated by agencies such as the Securities and Exchange Commission (SEC).
Taxes
Another difference between options and listed options is taxes. When an option is exercised, the holder may pay taxes on the profit. The holder does not have to pay any taxes on the profit with a listed option.
Risk
The last difference between options and listed options is the risk. A model determines an option’s price; however, the price of a listed option is determined by supply and demand. Therefore, options are considered high-risk instruments, while listed options are considered lower-risk instruments.
What are the risks of trading with options and listed options?
Market risk
The first risk of trading with options and listed options is market risk, which is the risk that the price of the underlying asset will move against the position taken by the trader.
Liquidity risk
The second risk of trading with options and listed options is liquidity risk., which is the risk that the market for the option will not be liquid enough to allow the trader to exit the position at a fair price.
Credit risk
The third risk of trading with options and listed options is credit risk, which is the risk that the counterpart to the contract will not be able to fulfill their obligations.
Interest rate risk
The fourth risk of trading with options and listed options is interest rate risk, which is the risk that the interest rates will change and the option will lose value.
Volatility risk
The fifth and final risk of trading with options and listed options is volatility risk, which is the risk that the underlying asset will experience a sudden price change, which will cause the option to lose value.