What is an Option Disclosure Document
The option disclosure document (ODD) is a publication issued by the Options Clearing Corporation (OCC) that serves as an important guide for options traders. The comprehensive document, formally titled Characteristics & Risks of Standardized Options, is particularly essential for novice options traders.
BREAKING DOWN Option Disclosure Document
First published in 1994, the option disclosure document (ODD) has taken on a number of supplements over the subsequent 20 years to clarify earlier concepts and accommodate the growing complexity of options products over the development of the derivatives market.
The current version of the document runs 183 pages. The main chapter headings include:
- Options Nomenclature
- Options on Equity Securities
- Index Options
- Debt Options
- Foreign Currency Options
- Flexibly Structured Options
- Exercise and Settlement
- Tax Considerations, Transaction Costs and Margin Requirements
- Principal Risks of Options Positions
Aside from the basic description of various option types, perhaps the most important section of the ODD is the "Principal Risks of Options Positions." Someone new to the options markets would be wise to carefully read this section, which goes over the main risks of each of the option types explained in the document and provides some examples of how a trader may lose money. Even a seasoned trader would find the document useful for reminders.
The risk disclosure segment bluntly begins: "An option holder runs the risk of losing the entire amount paid for the option in a relative short period of time." That may be obvious to an experienced options trader, but the following warning may not be so obvious: "An investor who holds a spread position in cash-settled index options and is assigned an exercise is at risk for any adverse movement in the prices of the constituent securities of the index after the time the exercise settlement value of the assigned short is determined unless the investor is able to exercise the long leg of the spread in time to receive that exercise settlement value."