How OTC Option Margins, Volatility, and Liquidity Are Set
Summary
The document describes how several features of over-the-counter options depend on the specific product and counterparty. It says margin is set by the market participants responsible for settling OTC contracts, subject to any applicable regulatory requirements. Implied volatility is determined by market supply and demand rather than by a universal OTC convention. Liquidity likewise varies with the instrument: the response contrasts liquid foreign-exchange options with less frequently traded exotic options and notes that equity options activity differs across markets.
Settlement form, whether cash-settled or deliverable, is presented as a matter of bilateral agreement. The answer does not provide a margin formula, a detailed method for quoting implied volatility, or evidence about trading platforms and execution workflows. Its examples are qualitative and market-specific, so they should not be treated as current liquidity estimates or general rules for every OTC equity option. The central takeaway is that OTC contract terms, pricing inputs, and liquidity are negotiated and depend heavily on the underlying and counterparties.
Key ideas
- OTC option margin is set by market participants who settle the contracts, within regulatory constraints.
- Implied volatility reflects supply and demand for the particular OTC option.
- Liquidity varies by product and market, with no single standard measure given.
- Cash settlement or physical delivery depends on the agreement between counterparties.
- The answer gives qualitative examples but no margin calculation or platform comparison.
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Full text
# OTC Equity Options' Dynamics # OTC Equity Options' Dynamics This only applies to options that do not have marketable equivalents since margin can be marked to them. I've never been able to find this on my goog. How is margin typically calculated for OTC equity options? I guess mostly, in the contract, how is IV determined? Also, are the OTC equity option markets liquid enough to provide "constant" bids and asks for "standardized" (whatever that is) contracts? Does the same go for cash-settled options? Are cash-settled options as liquid as their deliverable counterparts? Addition Are the platforms (if they even exist) as well structured as your common broker java platform, or is everything ad hoc, bulletin board, over the phone? ## Answer by Matt Wolf (score 2) https://quant.stackexchange.com/a/7299 - Margin is determined by those who are in the business of settling options contracts. In the OTC that would be those who make markets in OTC options. (Subject to regulatory requirements if imposed) - IV is determined by market forces, supply and demand. The same applies to options written on bananas and chimps. - liquidity depends again on supply and demand of the specific product. There is no "standardized" way to determine this. FX OTC options on the liquid pairs are more liquid than anything listed in this particular space. In Asia, most equity options are traded OTC (you can count the number contracts on one hand that change hands in listed options at the TSE at any given day). Other OTC options, especially exotics (such as PRDCs) trade sometimes 4-5 times in a week even at tier 1 houses in Tokyo. - cash-settled or deliverable depends on the agreement between the OTC counter parties. If I want to exercise the underlying of my ITM call options in gold delivered into my vault then I can ask Goldman to do so (I am sure they will happily oblige for a negligible add-on fee).
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