24 lines
1.7 KiB
Plaintext
24 lines
1.7 KiB
Plaintext
The Options Clearing Corporation
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Remember when Wimpy would tell Popeye, “I’ll gladly pay you Tuesday
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for a hamburger today.” Did Popeye ever get paid for those burgers? In a
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contract, it’s very important for each party to hold up his end of the bargain
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—especially when there is money at stake. How does a trader know the
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party on the other side of an option contract will in fact do that? That’s
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where the Options Clearing Corporation (OCC) comes into play.
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The OCC ultimately guarantees every options trade. In 2010, that was
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almost 3.9 billion listed-options contracts. The OCC accomplishes this
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through many clearing members. Here’s how it works: When Trader X buys
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an option through a broker, the broker submits the trade information to its
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clearing firm. The trader on the other side of this transaction, Trader Y, who
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is probably a market maker, submits the trade to his clearing firm. The two
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clearing firms (one representing Trader X’s buy, the other representing
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Trader Y’s sell) each submit the trade information to the OCC, which
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“matches up” the trade.
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If Trader Y buys back the option to close the position, how does that
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affect Trader X if he wants to exercise it? It doesn’t. The OCC, acting as an
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intermediary, assigns one of its clearing members with a customer that is
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short the option in question to deliver the stock to Trader X’s clearing firm,
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which in turn delivers the stock to Trader X. The clearing member then
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assigns one of its customers who is short the option. The clearing member
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will assign the trader either randomly or first in, first out. Effectively, the
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OCC is the ultimate counterparty to both the exercise and the assignment. |