Articles and Updates

OIC instructor Roma Colwell was joined by Jose Terrazas, Senior Associate, Market Risk & Default Management, OCC, on a visit to Roosevelt University to engage students from the finance club in a discussion about how the listed options market operates

Ever wonder how options ‘end-of-day marks’ are determined? Behind those ‘closing mark’ prices lies a precise, system-wide process known as mark-to-market, a cornerstone of how OCC safeguards market integrity each day. But before we examine what it is, let’s clarify what it’s not. It is not the bid price, the offer price, the midpoint, nor the last sale price. Most significantly, it is not a tradable value; actual transactions occur within the bid-ask spread throughout market hours.  What is the Mark-to-Market Process? The term "mark price" originates from a reporting process known as "mark-to-market." In the context of options, OCC computes these EOD marks using a proprietary 29-point binomial algorithm derived from the Cox-Ross-Rubinstein model. The algorithm takes into account factors such as closing bid/ask markets, implied volatility levels and several others. The objective is to reflect a fair and consistent measure of each contract’s current value for margin and risk purposes. This critical process helps clearing members maintain adequate collateral when calculating open positions’ daily P&L, margin requirements, and portfolio valuation.  Through this daily mark-to-market process, OCC fulfills its role as a central counterparty and as a Systemically Important Financial Market Utility (SIFMU), ensuring the U.S. options market operates with integrity, transparency, and minimal systemic risk. By providing these risk management services, OCC furthers its mission to promote market stability and integrity. What is OCC's Daily Process? The Mark-to-Market Process Flow

In November, OIC hosted two webinars, Navigating ETFs & Indices: Trading Vehicles for Broad Market Exposure led by OIC instructors Ken Keating and Mark Benzaquen and the other Cash-Settled Options Explained: Mechanics and Strategic Applications led by OIC instructor Roma Colwell.   These sessions explored index and ETF options, volatility products, and cash settlement mechanics. Both sessions provided practical, foundational knowledge needed to navigate these products, clarifying structural differences that potentially have major implications for risk, assignment, and trading outcomes. They explained how end-of-day values ensure a fair and orderly market and how cash-settled index options reduce the risk of unwanted assignment or losing shares through exercise.  What We Covered: Structural Differences Between Index Options and Equity/ ETF Options Matter  Settlement: Index options settle in cash, while equity/ETF options typically settle physically.  Exercise Style: Index options are commonly European-style (exercise only at expiration), while equity/ETF options are American-style (exercise anytime).  Timing: Some index contracts have AM settlement, while all ETF options follow PM settlement.  Deliverables: Index options have no shares delivered—only a cash transfer.  Cash Settlement Preserves the Underlying Portfolio  At expiration, the intrinsic value—if any—is simply transferred as cash (settling T+1). This makes broad-based index options particularly appealing for:  Hedging diversified portfolios  Managing index-level exposure  Avoiding the operational complexities of physical delivery  End-of-Day Values Are Calculated, Not Traded  OCC determines the end-of-day theoretical price for all options using a smoothing algorithm, rather than relying on the last trade. These closing marks serve as the basis for:  Daily P&L  Margin requirements  Risk monitoring.  Keep Learning:      Key Moments from Navigating ETFs & Indices: Trading Vehicles for Broad Market Exposure  Key Moments from Cash-Settled Options Explained: Mechanics and Strategic Applications  Meet OIC instructor Roma Colwell:   Roma Colwell Roma Colwell is an Associate Principal, Investor Education at OCC and is an instructor for The Options Industry Council (OIC). Roma has more than 27 years in the securities industry, 18 of which were spent as a floor broker, market maker, specialist and risk manager in both San Francisco and Chicago.

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