It stands for exchange-traded option; an option (exchange-traded derivative) that trades on organized and regulated exchanges, as opposed to options trade over the counter. Exchanges significantly enhance options’ liquidity and consequently reduce the transaction costs of trading options. The exchanges, also, mitigate the counterparty risk associated with such a trading. In turn, this lowers transaction costs of smaller-size trades. However, not all types of options can or should be exchange-traded. Minimal volume of trade should be observed and sought to provide for a minimal level of profit for exchanges. This volume is mainly a function of two factors: standardization of contracts and attractiveness to a sufficiently wide range of potential users and market makers.
Derivatives
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