A listed option is a standardized financial derivative traded on a regulated exchange, giving investors the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a set time frame.
Listed options are standardized contracts traded on formal exchanges such as the Chicago Board Options Exchange (CBOE). These contracts provide the buyer the right, but not the obligation, to buy (call option) or sell (put option) a specified quantity of an underlying security, such as stocks, indexes, or ETFs, at a specified price known as the strike price before or on a certain expiration date. The standardization covers contract size, expiration dates, and strike prices which facilitates liquidity and transparency in the options market. Listed options are governed by the exchange’s rules, and prices are quoted publicly, helping investors and advisors assess market sentiment and price discovery.
Listed options play a critical role in wealth management and family office investment strategies by allowing for enhanced portfolio management tactics such as income generation, risk hedging, and speculation with defined risk. These instruments can be used to customize exposure and manage downside risks without outright selling the underlying asset, which is valuable for tax efficiency and governance in multi-generational portfolios. Additionally, listed options improve reporting clarity due to their standardized nature, facilitating easier valuation and compliance with regulatory and fiduciary standards. Understanding listed options also supports sophisticated tax planning strategies, as the timing and nature of option exercises can impact capital gains realization and tax liabilities.
Consider a family office holding 1,000 shares of a publicly traded stock currently priced at $100 per share. The office buys a listed put option contract (each contract typically covers 100 shares) with a strike price of $95 expiring in three months for a premium of $3 per share. This put option gives the right to sell the shares at $95, effectively setting a floor price. If the stock price drops to $85, the family office can exercise the put option and sell shares at $95, limiting losses. The total premium paid is $300 (1 contract × 100 shares × $3), offering downside protection with a controlled cost.
Over-the-Counter Option
While listed options are standardized and traded on regulated exchanges, over-the-counter (OTC) options are bespoke contracts negotiated privately between parties without standardization or exchange listing. OTC options offer customization but come with less liquidity and higher counterparty risk.
What differentiates a listed option from other options?
A listed option is standardized in terms of contract size, expiration dates, and strike prices, and is traded on a regulated exchange, offering liquidity, transparency, and regulated trading, unlike customized over-the-counter options.
Can listed options be used for both hedging and speculation?
Yes, listed options allow investors to hedge existing portfolio positions against downside risk or to speculate on price movements of underlying assets with controlled risk exposure.
Is the exercise of a listed option mandatory?
No, the holder of a listed option has the right but not the obligation to exercise the option before expiration, allowing flexibility in strategy.
