STSM112100 - Derivatives: introduction to options: over the counter options

An Over The Counter (OTC) option originates from the days when options, for example, were typically acquired ‘over the counter’ of a bank. The characteristics of an OTC option contract include the following:

  • Similar to a traded or traditional option, an OTC 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.
  • In broad terms, an OTC option contract can represent dealings in underlying equity securities which are listed or unlisted on investment exchanges.
  • The majority of OTC options are bespoke arrangements between a single seller and a single buyer in the same way as traditional options, but unlike a traditional option the rights to an OTC option contract can be secondary traded on an exchange.
  • An OTC option contract is generally undertaken ‘off-exchange’ rather than being subject to the rules of an investment exchange.
  • Whereas exchange listed traded options have standardised contract specifications (i.e. fixed option periods, contract sizes etc.) OTC contracts are available on a wide range of underlying assets with sufficiently flexible option terns that can be individually tailored to the requirements of the parties involved.
  • OTC option ‘strike’ prices are less transparent to the Market because OTC option contracts may not be listed on an investment exchange.
  • The rights to an OTC option contract are not easily transferable as they are not generally exchange related.
  • The majority of OTC equity option contracts either lapse upon expiry of the option period or are exercised with the resultant delivery and settlement of the underlying securities.

See STSM112010 for the meaning of ‘strike’ price

See STSM112050 for the meaning of option exercise

See STSM112080 for further information on a Traded Option

See STSM112090for further information on a Traditional Option