Trading Options Futures in Asset Listed Exchanges
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Have you ever tried to list a Property for sale only to have it sold immediately after you list it No? Something like that rarely happens. The same thing goes for buyers trying to find sellers of property they want to purchase. Often, you have to search far and wide, using an agent, and then you have to spend time with attorneys and bankers, not to mention the negotiating process with the seller to finally come up with a transaction price. There just isn't any centralized marketplace where you can simply pick up the phone and say "sell" and have your house instantly sold. When it comes to stocks and commodities or Options futures however, there are centralized locations to buy and sell instantly these are. Those locations are called exchanges it is here that all Options futures and any kind of stock is traded. Most people have heard of Wall Street. That's the location of the New York Stock Exchange and the American Stock Exchange. Chicago is the location of the biggest exchanges for commodity traders - The Chicago Board of Trade and the Chicago Mercantile Exchange. Back in the early-1970s, traders at the Chicago Board of Trade got together and decided to begin trading options futures. This eventually led to the world's busiest options futures exchange, The Chicago Board Options Exchange. A few years later, the options futures exchanges began trading options on their own products - futures contracts. Currently, all of the major futures exchanges trade futures options on commodities. There are also five U.S. exchanges that trade futures options on stocks, stock indexes, interest rate products and currencies. Those exchanges are: The Chicago Board Options Exchange, The American Stock Exchange, The Philadelphia Stock Exchange. The One reason that exchanges can provide you with instantaneous purchase and sale transactions is because the products available for purchase and sale are identical. That is, one share of IBM is identical to another share of IBM. As far as the commodity exchanges are concerned, they make sure that each ounce of gold is identical to all the others. They even do quality checks for products like oil and soybeans and orange juice. They want their customers to know that when they buy a barrel of oil (for example) that the oil they're getting will be identical to all the oil that all other oil buyers get. Obviously, this could never be true of real estate. That's because each property is different, with its own set of individual advantages and disadvantages. Because no property is identical, you simply can't buy and sell, sight unseen. But with exchange-traded products or options futures, you can buy and sell sight unseen, because you know that every share of Ford is going to be exactly like every other share of Ford, and every bushel of corn is just like every other bushel of corn. So when you want to sell, someone else can buy with confidence. A market that offers the ability to instantly enter and exit positions at a reasonable price is said to have "liquidity". The other advantage to exchanges is that they eliminate counter- risk. Take for example the real estate transaction. Typically, you've got to set up a meeting, with an attorney present, sign dozens of contracts and forms, and make payments only with bank- certified checks. Then and only then does the property change ownershipship. The reason for all of this is to prevent, as much as possible, one party to the transaction from defrauding the other party to the transaction. The bank certified check is a classic example of this. It protects the seller by reducing the chance that the buyer might present a bogus check. Needless to say, when you pick up the phone to buy or sell a stock or options futures, you aren't being asked to present a certified check. That's because the brokerage firm instantly acts upon your request, and the exchange guarantees the trade. Let's say a trader places an order to buy an options future. What happens is that the order goes to the exchange, and then someone sells that trader the options futures. If the buyer then backs out of the trade, the seller has still sold the option. That's because the exchange and the broker guarantee that the trade has been executed and both will stand behind it. Essentially, the trader has bought the option. But if the option buyer suddenly backs out of the trade, the brokerage firm has become the buyer of the options futures. If for some unforeseen reason the brokerage firm can't meet the obligation, then the exchange itself and its many members stand behind the trade. This multiple level of redundancy on "listed" stocks, futures and stock options futures is one of the key ingredients to having a successful marketplace. Many traders take it for granted, but it is the one critical factor that gives traders around the globe enough confidence, so that when they pick up the telephone to place an order, they know that they are getting exactly what they ordered. And they don't have to worry about the performance of the person taking the other side of their trade. An example occurred in 1987. The stock market crashed in October of that year and many options futures traders got wiped out. It was so bad that these traders were unable to meet their commitments. That left the brokerage firms to make up the difference. Some smaller firms were unable to handle the financial stress, which meant that the exchange members had to meet the commitment individual traders were unable to meet. The next day, the Federal Reserve Board stepped in and strongly hinted, in a very carefully worded, prepared statement, that banks go ahead and loan as much money as needed to exchange member firms, so that the exchange members could meet the financial obligations of all traders. With those words, counterparty risk was eliminated and a crisis was averted. Confused? Get a FREE System Here!