Non-Equity Option

Definition

The term non-equity option refers to an option that has an underlying asset which is not a common stock.  Non-equity options usually refer to options with underlying assets such as commodities and market indexes.

Explanation

Non-equity options include agreements with underlying assets such as commodities, currencies, real estate and indexes.  It's a catch-all phrase used to categorize any option that is not tied to common stock.  Non-equity options are oftentimes also European options, which means they can only be exercised on a certain date and they typically trade over-the-counter.

Investors can use non-equity options as hedges against price movements of the underlying asset.  For example, a trader wishing to hedge against the movement of a currency can purchase a non-equity option.  Used in this manner, these financial instruments play an important role in controlling risk.

Related Terms

ask price, bid price, margin call, market maker