What Is a Listed Option?

A listed option is a type of investment option that is traded on a registered exchange, rather than being offered in an under the counter environment. The range of options that are sold in this manner include just about every type of investment, including shares of common stock, exchange traded funds (ETFs), commodities, and any other options that are structured to include specific expiration or maturity dates as well as prices. One of the benefits of choosing to invest in a listed option is that there are certain protections for any investment traded in an exchange that may or may not apply to an option that is traded over the counter.

Sometimes known as an exchange traded option, a listed option is subject to the rules and regulations that are put in place by the exchange in which the asset is traded. This is in contrast to over the counter trades in which all or at least a portion of those regulations may not apply. What this means for an investor is that choosing to secure a listed option will carry less volatility than attempting to work with an option that is set up over the counter.

Two different incarnations or styles of the listed option are in common use. The American style calls for trading on a registered exchange, and will often be structured with a longer window between the date of purchase and the expiration date. This means that there is a broader window of time for the investor to make a decision whether to exercise that option or simply allow it to expire. The second approach, known as the European option, also allows the investor to exercise the option at various times up to the date of expiration, but tends to provide a much smaller window of time between purchase and that expiry date.

The value of going with a listed option helps to reduce the level of risk that is assumed by the investor. Since an option traded on an exchange requires that the structure of the deal follow criteria that meets both the trade regulations that apply in the country of origin and the standards set by that exchange, the potential for the investor to be adversely affected focuses mainly on the pricing that is agreed upon by the buyer and the seller. As long as the investor makes the proper decisions in terms of when and if to actually exercise the option, the potential for some unknown factor to trigger unanticipated losses is kept to a minimum.