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HMRC internal manual

Stamp Taxes on Shares Manual

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HM Revenue & Customs
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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 subject to the rules of an investment exchange.
  • Whereas exchange listed traded options are standardised contract specifications i.e. fixed option periods, contract sizes etc, OTC contracts are available on a wide range of underlying assets, with the option terms sufficiently flexible and 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 a 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