Structure of Option Markets

Dr G D Sharma USMS GGSIP University, New Delhi

Important Concepts
Definitions and examples of call and put options Institutional characteristics of options markets Options available for trading Placing an options order The clearinghouse Accessing option price quotations Transaction costs Regulation of options markets Margins and taxes in option transactions

Option terminology price/premium call vs. put exercise price/strike price/striking price expiration date

Everyday examples of options rain check discount coupon airline ticket with cancellation right right to drop a course

Development of Options Markets

Early origins Put and Call Brokers and Dealers Association Chicago Board Options Exchange, 1973 Resurgence of over-the-counter market

Call Options
Current example Objective of a call buyer Moneyness concepts
In-the-money

Out-of-the-money
At-the-money

Put Options
Current example Objective of a put buyer Moneyness concepts
In-the-money

Out-of-the-money
At-the-money

Over-the-Counter Options Market

Worldwide Credit risk Customized terms Private transactions Unregulated Options on stocks and stock indices, bonds, interest rates, commodities,
swaps & currencies

Organized Options Trading

The concept of an options exchange

Listing Requirements Contract Size Exercise Prices Expiration Dates Position and Exercise Limits

Option Traders
Liquidity Providers
Provide bid and ask prices to facilitate trading Scalpers, position traders, spreaders Lead market makers, designated primary market makers

Floor Broker acts as agent for customers Order Book Official

Limit orders Electronic order processing

Options Traders (continued)

Other Option Trading Systems
Specialists
Registered options traders Electronic trading systems

Off-Floor Option Traders

Option brokers Proprietary options traders

Mechanics of Trading
Placing an Opening Order
Types of orders

Role of the Clearinghouse

Options Clearing Corporation (OCC)
Clearing firms Margin Open interest

Mechanics of Trading (continued)

Placing an Offsetting Order
In the exchange-listed options market In the over-the-counter options market

Exercising an Option
European vs. American style Assignment Cash settlement

Option Price Quotations

See Web sites of newspapers and options exchanges Problems
Delayed information Non-synchronized prices

Types of Options
Stock Options
Index Options Currency Options Other Types of Options interest rate options currency options options attached to bonds

exotic options
warrants, callable bonds, convertible bonds non-traded executive options

Real Options

Transaction Costs in Option Trading

Floor Trading and Clearing Fees Commissions Bid-Ask Spread Other Transaction Costs

The Regulation of Options Markets

Federal regulation

Industry regulation
Over-the-counter market regulation The issue of which agency has regulatory responsibility has occasionally arisen.

gagan.is.sharma@gmail.com

GDS

3/19/2014

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