Posted in Finance, Accounting and Economics Terms, Total Reads: 667
Definition: Non-Equity Option
It refers to a type of option in which the underlying is other than a common stock. Examples of non-equity option include options in which the underlying security is: commodities, futures, real estate and fixed income securities. Hence Non-equity option is a broad term which encapsulates various types of options in itself.
Generally non-equity options are not traded on any exchange and are not supported by any clearing house. Non-equity options are generally known for over the counter (OTC - refers to stocks that mainly trade via a dealer network rather than on a centralized exchange like NYSE or BSE) instruments.
Similar to other derivatives, non-equity options are used to hedge against the price change of the underlying instrument. The buyer of the option has limited risk in the form of the option premium that the buyer pays in case the buyer fails to exercise the option by the due date. Non-equity options allow traders to speculate and hedge against movement in commodities such as gold or the movement in the yield to maturity of a particular fixed income instrument. Traders can exchange the options or buy/sell options to hedge the risk against movement in price. As the market for commodities trading is increasing day by day non-equity options are becoming very important tool for risk mitigation and hence is reinforcing the trading on commodities as the risk mitigation market is also huge.