Regarding trading, there are a few different types of options available. Listed options are those traded on an exchange, while OTC (Over the Counter) options are those traded over the counter. UAE traders may wonder what distinguishes these two types of options and what benefits are associated with each. In this article, we’ll take a closer look at both listed and OTC options in UAE and discuss some of the key differences between them.
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The definition and benefits of listed options
It is pretty simple – a listed option is an option that is listed and traded on an exchange. The most popular exchange for listed options in UAE is the Dubai Gold and Commodities Exchange (DGCX). Listed options are also referred to as exchange-traded options.
There are many benefits associated with trading listed options in the UAE. First, listed options offer greater transparency, as all trades are conducted on the exchange and are visible to everyone. It increases price discovery and helps to ensure that prices are fair and reflect actual market conditions.
Another benefit of trading listed options is that they offer greater liquidity. There is always someone willing to buy or sell a particular option contract on the exchange, so traders can quickly enter and exit positions. It contrasts OTC options, which can be more challenging to trade.
Lastly, listed options tend to be less expensive than OTC options, and this is because the exchange charges fees for each trade, whereas OTC options are traded directly between two parties with no third-party involvement.
The definition and benefits of the OTC option
OTC options are those that are traded over the counter, which means that they are not traded on an exchange. Instead, they are traded directly between two parties, typically large financial institutions.
One of the main benefits of trading OTC options is that they offer more flexibility than listed options. It is because there is no need to adhere to exchange rules and regulations. For example, OTC options can be customised to suit the needs of the parties involved, whereas listed options must be traded as standardised contracts.
Another benefit of OTC options is that they offer greater privacy, and all trades are conducted directly between the parties involved, with no third-party involvement. It contrasts with listed options, which are traded on public exchanges and therefore visible to everyone.
Lastly, OTC options tend to be more expensive than listed options, and it is because there is no exchange fee involved and the two parties involved in the trade typically have more bargaining power than in a listed options trade.
How do the two types of options differ regarding liquidity and regulation?
As we have seen, the UAE has many critical differences between listed and OTC options, and one of the most notable differences is in terms of liquidity and regulation.
Listed options are more liquid than OTC options, as they are traded on public exchanges, and there is always someone willing to buy or sell a particular option contract. In addition, listed options are subject to stricter regulation than OTC options, as they must adhere to exchange rules and regulations.
On the other hand, OTC options are less liquid than listed options, as they are traded directly between two parties with no third-party involvement. In addition, OTC options are not subject to the same level of regulation as listed options, as they are not traded on public exchanges.
What factors should you consider when choosing between a listed and an OTC option?
There are many crucial factors that you should consider when choosing between a listed and an OTC option in the UAE.
The first factor to consider is liquidity. As we have seen, listed options are more liquid than OTC options, which means they are easier to trade. If you are looking for a quick and easy way to enter or exit a position, a listed option may be the best.
The second factor to consider is regulation. Listed options are subject to stricter regulation than OTC options, which may be less risky. If you are looking for a safe and secure way to trade, a listed option may be the best choice.
The third factor to consider is cost. As we have seen, OTC options tend to be more expensive than listed options. If you are looking for a cheaper way to trade, then an OTC option may be the best choice for you.
So, which type of option is better?
It depends on your individual needs and preferences. If you need greater liquidity and regulation, then listed options may be the better choice. However, if you need more flexibility and privacy, then OTC options may be the better choice. Whichever type of option you choose, ensure that you understand the critical differences between them befor