Trading assets over-the-counter offers myriad advantages – but only if you’re a certain type of investor with specific needs. Let’s take a closer look at how this process works. 

What are OTC Options?

OTC options are options that are traded over-the-counter rather than through the conventional trading process offered by an exchange/clearinghouse. Trading options over-the-counter involves a private transaction between buyer and seller that can be facilitated by a third party. 

OTC options offer features not seen with conventional options, and OTC trades are often attached to exotic assets that are not commonly available to trade on many brokerages/platforms. 

OTC options do not have a secondary market (secondary markets, such as the New York Stock Exchange, are where retail traders typically transact).

How do OTC Options Work?

Conventional options sometimes do not have the flexibility that investors seek, especially if those investors are looking at less well-known assets or they require a more specific set of trading parameters than usually offered.

In such cases, OTC options can provide a more appealing alternative, given that they are generally less restrictive.

For example, OTC options do not have standardized strikes prices or expiration dates. This allows traders to be far more flexible with such terms.

Additionally, moving into OTC markets can allow traders to transact in assets that are exotic or hard to find in formal exchanges.

Aside from the process of removing the traditional intermediary, OTC trades work much like conventional trades as far as shares and option contracts are concerned.

Why Should You Trade OTC Options? 

Instead of having options processed through a clearinghouse/exchange (effectively serving as a middleman), traders can interact directly by moving transactions over-the-counter. This allows them to escape restrictions placed on them by exchanges when trading OTC options, which helps enable more precise positions and can potentially lower costs.

 For example, instead of accepting pre-set strike prices and expiration dates, the OTC buyer and seller can determine their own preferred strike and expiration date. They can also write-in conditions to transactions that are not possible with conventional options, further enhancing the flexibility. This makes OTC options almost completely customizable.

OTC options investing transactions also offer the benefit of privacy for buyers and sellers.

There are, however, some issues of which to be aware.  OTC options have no disclosure requirements and lack the same protections that are customary with highly regulated exchanges/clearinghouses. This lack of oversight can significantly increase counterparty risk.

Additionally, the lack of a secondary market means that OTC options can only be closed by creating a new, offsetting trade, which effectively cancels out the original trade. While this is not particularly cumbersome, it is not as efficient as simply selling your position to an exchange.

Finally, liquidity in the OTC options market can be quite thin relative to conventional options, which may make it difficult to exit a position on preferred timing and terms. 

Carefully evaluating these differences can help you make a determination as to whether options traded over the counter are the right financial instruments for you.


How to Successfully Invest in OTC Options?

The nuts and bolts of trading OTC options is reasonably straightforward. You simply open an account with a dealer or broker who offers this feature, assuming you meet the necessary qualifications for trading options over the counter.

While many OTC stock trading is fairly widely available, OTC options are more of a specialty within the industry. 

Learning the basics of OTC options, and choosing the right partner to facilitate trades, is critically important in terms of setting the groundwork for trading success. 

Elements such as ease of placing OTC orders, cost and quality of client assistance are all key variables to weigh when choosing an investment partner. 

Smart traders also understand both the benefits and potential drawbacks of trading OTC before deciding to move ahead.


How RJO Futures can Help You Invest in Options on OTC Stocks

 RJO Futures has an unparalleled combination of advanced trading tools, seasoned investment professionals and a library of actionable information.

We are one of the oldest and largest independent futures brokerage firms in North America. We offer a full range of trading services to a vast global network of brokers and commercial, institutional and individual investors.

If you’re interested in trading OTC options, we urge you to reach out to an RJO professional today to learn more about how we help put traders in the best possible position to succeed.