Listed Option (Exchange-Traded Option)

Key takeaways
* A listed option—also called an exchange-traded option—is a standardized derivative contract traded on an exchange and guaranteed through a clearinghouse.
* It gives the buyer the right (but not the obligation) to buy (call) or sell (put) a set quantity of an underlying asset at a specified strike price on or before a predetermined expiration date.
* Standardization increases liquidity, narrows bid‑ask spreads, and allows clearinghouses (for example, the Options Clearing Corporation) to guarantee performance; the main drawback is limited customization compared with over‑the‑counter (OTC) options.

What is a listed option?

A listed option is a standardized contract listed on an organized exchange (for example, the Cboe Options Exchange). Each contract specifies the underlying asset, contract size (commonly 100 shares for U.S. equity options), strike price(s), and expiration date(s). Regulators such as the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) oversee the markets where these options trade.

How it works

• Call option: gives the holder the right to buy the underlying asset at the strike price.
• Put option: gives the holder the right to sell the underlying asset at the strike price.
• Exercise/expiration: options can be exercised on or before their expiration depending on contract style (e.g., American vs. European). Settlement is handled through a clearinghouse that matches and guarantees counterparties.
• Clearinghouse guarantee: clearing organizations (such as the Options Clearing Corporation) stand between buyers and sellers to ensure obligations are fulfilled, reducing counterparty risk.

Benefits

• Standardization: uniform strikes, expirations, and contract sizes make contracts interchangeable and easy to trade.
• Liquidity: standardized contracts attract more participants, which improves market depth and makes it easier to enter and exit positions.
• Lower transaction costs: higher volume and competition typically narrow bid‑ask spreads.
• Reduced counterparty risk: clearinghouses guarantee performance, so traders aren’t exposed to individual counterparty defaults.
• Regulatory oversight: exchange listing places trades under established market rules and regulator supervision.

Drawbacks

• Limited customization: unlike OTC options, listed options cannot be tailored to specific bespoke terms (strike, notional, or settlement method). Traders with highly specialized needs may prefer OTC contracts.
• In practice, most traders find the available range of strikes and expirations sufficient for common strategies.

Conclusion

Listed (exchange‑traded) options offer a standardized, liquid, and regulated way to trade options with the added security of clearinghouse guarantees. Their main tradeoff is reduced flexibility compared with bespoke OTC contracts, but for most investors and traders the benefits of liquidity, transparency, and lower counterparty risk make them the preferred market for options trading.