Escrow Receipt

What Is an Escrow Receipt?

An escrow receipt is a bank or clearing statement written to guarantee that an options writer has a sufficient amount of the underlying security available for delivery, should the need arise to complete the requirements of the contract.

Sellers (writers) of options are at risk of assignment (having to deliver the security) if the option goes in the money (ITM). For call writers, they would have to deliver shares to the long. For writers of puts, they would need enough liquid funds to purchase shares put to the long.

Key Takeaways

  • An escrow receipt is a bank or clearing statement that is part of an options contract.
  • The escrow receipt vouches that the writer of options has enough shares of the underlying security to satisfy a potential assignment—that is, to actually deliver the security if the option's exercised.
  • An escrow receipt is most often utilized when a client's options account is held at a bank, rather than a registered broker-dealer.
  • The escrow receipt must be written in such a way to be acceptable to the exchange and the Options Clearing Corporation (OCC), or any other similar regulatory body.

Understanding Escrow Receipts

An escrow receipt is a bank or clearing firm guarantee that certifies an option writer holds enough of the underlying security on deposit and it is readily available for delivery if the holder of that option chooses to exercise it. This ensures that the holder of an option will receive delivery of exercised options on time and without any issue.

This guarantee is most often utilized when a client's options account is held at a bank, rather than with a registered broker-dealer. The escrow receipt must be written in such a way to be acceptable to the exchange and the Options Clearing Corporation (OCC), or any other similar regulatory body. The use of escrow accounts and receipts provides written evidence and assurance that the securities are available to complete the transaction.

Some institutional clients, such as pensions or insurance companies, maintain their assets at a custodian bank, rather than at a registered broker-dealer. An options exchange's margin rules may allow a broker-dealer to accept an escrow receipt (or escrow agreement) with respect to short options positions, in lieu of posted cash or securities.

since it is only guaranteeing the potential for delivery, the escrow receipt may never be needed If the short options position is never assigned—for instance, if it expires out of the money (OTM)—the escrow receipt will not be invoked.

In options trading, the difference between "in the money" (ITM) and "out of the money" (OTM) is a matter of the strike price's position relative to the market value of the underlying stock. An ITM option is one with a strike price that has already been surpassed by the current stock price. An OTM option is one that has a strike price that the underlying security has yet to reach.


Examples of Escrow Receipts

An escrow receipt related to a short equity call option states that the option seller's bank promises to deliver the underlying stock to the broker-dealer in the event their customer's account (the long options position) is assigned. For a short equity put option, the bank promises to deliver cash in the amount of the equivalent short stock position.

The OCC also allows banks to write escrow receipts for short index options positions. For a short index call option, the bank promises that it will hold cash or cash equivalents, or at least one marginable equity security, or a combination of the three. The total value of the assets held by the bank must equal the aggregate underlying index value on the trade date. An escrow receipt with respect to a short index put option must be backed by cash or cash equivalents at the bank that equal the aggregate put exercise amount. The escrow receipt must also give the bank the authority to liquidate assets held under the agreement if necessary to meet an assignment.

What Is "In the Money"?

"In the money" (ITM) is an expression that refers to an option that possesses intrinsic value (as opposed to an "out of the money" option, which possesses no intrinsic value). ITM indicates that an option has value in a strike price that is favorable in comparison to the prevailing market price of the underlying asset.

  • An in-the-money call option means the option holder has the opportunity to buy the security below its current market price.
  • An in-the-money put option means the option holder can sell the security above its current market price.


What Does "Out the Money" Mean?

Out of the money, aka OTM, means an option has no intrinsic value because the underlying security has not yet reached the strike price of the option contract. A call option (to buy) is OTM if the underlying price is trading below the strike price of the call. A put option (to sell) is OTM if the underlying security's price is above the put's strike price.


What Is OTM, ATM, and ITM?

OTM, ATM, and ITM all refer to the status of options—specifically, the relationship of the option's strike price (the agreed-upon amount at which the option can be exercised) to the price of the security it's based on. OTM means out of the money—the option's strike price isn't better than the underlying security's. ITM means in the money—the option's strike price is favorable compared to the security's. ATM means at the money—option's strike price is identical to the current market price of the underlying security

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description