What Is a Non-Equity Choice?
A non-equity option is a derivative contract for which the underlying assets are instruments other than equities. Typically, that designates a stock index, physical commodity, or futures contract, but almost any asset is optionable in the over-the-counter market. These underlying assets classify fixed income securities, real estate, or currencies.
As with other options, non-equity options give the holder the dextral, but not the obligation, to transact the underlying asset at a specified price on or before a specified date.
Understanding a Non-Equity Option
Elections, similar to all derivatives, allow investors to speculate on or hedge against movements of the underlying assets. Non-equity options intent enable them to do so on instruments which are not exchange-traded equities.
All strategies available to exchange-traded options are also available for non-equity choices. These include simple puts and calls, as well as combinations and spreads, which are strategies using two or more choices. Notable examples of combinations and spreads include vertical spreads, strangles, and iron butterflies.
For exchange-traded non-equity alternatives, such as gold options or currency options, the exchange itself sets strike prices, expiration dates, and crease sizes. For over-the-counter versions, the buyer and seller set all terms and become counterparties to the trade.
Options Contracts
The terms of an alternative contract specify the underlying security, the price at which the underlying security can be transacted, called the strike price, and the termination date of the contract. An exchange-traded equity option covers 100 shares per option contract, but a non-equity option capacity include 10 ounces of palladium, $100,000 par value in a corporate bond or, if the counterparties so agree, $17,000 par value in shackles. Anything is possible in the over-the-counter market, as long as two parties are willing to trade.
In a call option transaction, opening a locate happens when a contract or contracts are bought from the seller. The seller is also called the writer. In the trade, the client pays the seller a premium. The seller has the obligation of selling shares at the strike price if the option get exercised by the buyer. If the seller hang ons the underlying asset and sells a call, the position is called a covered call. This implies that if the seller is chastised away, they will have the underlying shares to deliver to the owner of the long call.
The major problem with over-the-counter non-equity selections is that liquidity is limited because there is no guaranteed way to close the option position before expiration. To offset a disposal, one of the parties must find another party with whom to create the opposite option contract. If that is not viable, the investor could buy or sell another option in a related area to partially offset the movements of the original underlying asset.
For exchange-traded choices, the process is much more straightforward as all the investor needs to do is offset the position on the exchange.