Derivatives: introduction to options: traditional options
A traditional option is a financial instrument that grants the option holder the right, but not the obligation, to exercise the option and buy (i.e. a call option) or sell (i.e. a put option) an asset at an agreed ‘strike’ price within a prescribed period.
Similar to traded options (see STSM112080), traditional options over underlying equity securities can be initially listed on a stock exchange with traditional option prices published in the same way as underlying company share trading.
But, unlike traded options, once a traditional option contract is issued, the rights to a traditional option are non-transferable and cannot therefore be secondary traded on an exchange or, alternatively outside the marketplace between the option holder and a third party purchaser (commonly known as an Over the Counter (OTC) transaction).
The majority of traditional options are bespoke or tailored to suit agreements between a single seller and a single buyer, and so are different from traded options that have standardised conditions.
A traditional option underlying an equity security is therefore usually written as a result of a private arrangement agreed between the issuer and the ultimate holder of the option.
Furthermore, a traditional option underlying an equity security can only, unlike traded options, be exercised on specific dates before expiry of the option.
See STSM112010 for the meaning of ‘strike’ price
See STSM112050 for the meaning of option exercise
See STSM112100 for the meaning of Over the Counter (OTC)