Introduction

Listed options trade on exchanges in a manner that is similar to the trading in listed stocks. The exchanges maintain orderly markets for listed options and provide investors with a marketplace to buy and sell options. Because options are derivative securities and there are different types, classes and series of options, the options market has some unique trading features.

The Option Clearing Corporation

The Option Clearing Corporation or the OCC was created and is owned by the exchanges that trade options and is regulated by the SEC. The OCC issues all standardized options and guarantees their performance. The OCC does not guarantee a customer against a loss; it only guarantees the option’s performance. The OCC guarantees that if an investor who is short an option is unable to perform their obligation under the contract, the investor who is exercising the contract will still be able to do so without any delay. Without this performance guarantee, the trading of standardized options would be impossible. The OCC issues option contracts the day after the trade date and all standardized options will settle on the next business day or trade date + 1. When an investor closes out their position through either a closing purchase or sale, the OCC will eliminate the closing investor’s obligations or rights from its books. All standardized options of the same series are interchangeable or fungible. For example, all XYZ April 50 calls are the same. In order to meet the prospectus requirements of The Securities Act of 1933 the OCC publishes a disclosure document known as The Characteristics and Risks of Standardized Options. All option investors must be given this document prior to or at the time their account is approved for option trading.

THE OPTIONS MARKETS

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