- The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium.
- The various puts and calls for given security will be shown for different expiration dates, going out as far as a couple of years in the case of LEAPs.
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Unlike the standardized contracts that you can buy and sell on organized exchanges, OTC contracts are completely customizable. This presents some advantages, as you can effectively design your own contracts to fit in with your investment strategy. There are also some additional risks too though.
For one thing you don't have the protection of an exchange or clearing house; you are reliant on the counterparty to your contracts fulfilling their obligations. They do allow you to be a bit more creative but, in our opinion, there are enough risks involved in trading already without adding any more unnecessarily.
About Our Rankings We rank the best brokers in a variety of different categories, purely for the reason that who might be the right broker for one trader is not necessarily the right broker for another.
This is certainly true for a trader looking to trade OTC options, as there are many brokers that are really not focused on this area at all.
When we are ranking brokers we take several different factors into consideration. Certain factors are relevant for every category that we cover, with varying degrees of importance, while some are only relevant to specific categories.
OTC options are exotic options that trade in the over-the-counter market rather than on a formal exchange like exchange traded option contracts. Key Takeaways OTC options are exotic options that trade in the over-the-counter market rather than on a formal exchange like exchange traded option contracts.
Even some of the best trading platforms available aren't particularly great for placing OTC orders, and if this is going to be something that you do with any degree of regularity then clearly this can lead to frustration.
Ideally you want it to be as easy as possible to place all your orders, so this is something that has a significant impact on how we rank brokers in this category.
Cost of Transactions The costs of making transactions are relevant no matter what category we are ranking brokers for. The reason they are especially important for trading OTC options is that some brokers charge particularly high fees for buying and selling contracts of this type.
Therefore the fees and commissions for placing orders involving OTC contracts is a key factor to consider. Online Buying Restrictions Some online brokers place restrictions on what transactions can be carried out over the internet.
These restrictions will very often include certain types of OTC contracts. One of the major advantages of using an online broker is that you can place your orders with maximum convenience, without having to use the phone or some other method.
Therefore any broker that places heavy restrictions on what sort of transactions you can make over the internet is unlikely to be a great choice, particularly when trading OTC options.
Although exchange-listed stocks can be traded OTC on the third marketit is rarely the case.
Quality of Customer Support This is another factor that is relevant for all the categories we put brokers in. It is, however, particularly relevant in over- the- counter options trading category.
This is because transactions involving OTC options contracts can be somewhat more complicated than those involving standardized options contracts. You really need to be able to rely on decent customer support in the event that there are issues with your transactions that you need assistance with.
Summary Trading OTC options is different in many ways to trading the standardized contracts that are bought and sold on the exchanges.
We would advise beginners to avoid getting involved but there are some positive reasons for doing so for over- the- counter options trading that have some experience behind them. There are some key considerations you need to take into account if you are going down the OTC route though.
One such consideration is which broker you are going to use. As we have explained it's important to choose a broker that is good at handling the kind of transactions you will be looking to make.
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If you are looking to deal with OTC options then we do very strongly suggest that you use the brokers we have listed on this page, as they are definitely the most suitable in our opinion.