How Does the Institutional Use of Over-the-Counter (OTC) Options Differ from Exchange-Traded Options? ▴ Learn

How Does the Institutional Use of Over-the-Counter (OTC) Options Differ from Exchange-Traded Options?

OTC options are customized contracts negotiated directly between two parties, offering flexibility in terms, strike price, and expiration, but carrying higher counterparty risk. Exchange-traded options are standardized, centrally cleared, and have lower counterparty risk.

Institutions use OTC for tailored, large-volume hedges and exchange-traded options for liquid, standardized market exposure.

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