Articles and Updates

This month, OIC explored calendar spreads (time spreads using the same strike, different expirations) and diagonal spreads (different strikes, different expirations).

OIC instructor Mark Benzaquen joined Anthony Ewing, CEO and co-founder of Thoughtium, on the firm’s long-running live series Navigating Now.

OIC Instructor Mat Cashman appeared on Chicago Future of Finance with host Oliver Renick, a journalist and financial broadcaster who covers financial markets and innovation in trading. The series highlights Chicago’s role as a hub for derivatives, exchanges, and market infrastructure.

In August, OIC hosted two webinars featuring Mark Benzaquen, OIC instructor and Principal, Investor Education, OCC, covering both debit and credit spread strategies

Hosted by long-time trader and educator Jermal Chandler, the Tastylive show Engineering the Trade, explores the financial markets, volatility, and the realities of trading through in-depth conversations with industry professionals

In July, OIC hosted two webinars, The Protective Put: Managing Downside Risk and The Collar Strategy: Balancing Risk and Potential Reward, led by OIC instructor Roma Colwell.

There’s been a lot of chatter about the ‘Rule of 16’ lately, especially during these turbulent market times. While the math behind it is fairly basic, the idea itself deserves a closer look

In June, OIC hosted two webinars, Premium Income I: Covered Calls and the Poor Man’s Covered Call and Premium Income II: Cash-Secured Puts & the Wheel Strategy, led by Ken Keating, OIC Instructor and Principal, Investor Education, OCC.

Understanding the Risks and Rewards of Options Trading: Key Insights for Buyers and Sellers. In May, OIC hosted two webinars

In April, OIC hosted two webinars led by Mat Cashman, OIC Instructor and Principal, Investor Education, OCC. The sessions provided attendees with foundational tools for navigating option markets using volatility metrics.

The Options Industry Council (OIC) is excited to introduce Ask Us (Almost) Anything: OIC Office Hours! This initiative is an extension of our monthly webinar program and provides a dedicated forum for you to ask your options-related questions.

The first exchange-traded fund (ETF) in the U.S. was the S&P 500®; Depository Receipt (SPDR®), launched by the American Stock Exchange in January 1993.

OCC (The Options Clearing Corporation) / The Options Industry Council (OIC) attended the 2024 Benzinga Global Fintech Deal Day and Awards and was selected as winner of the “Best in Financial Education” award.

Every listed option has a minimum permitted trading increment. However, due to a program that started several years ago as an experiment and is now a permanent feature of the market, this increment can be as low as 1 penny.

For the final quarter of 2024, The Options Industry Council (OIC)® has a robust schedule of new events being prepared, including discussions of zero days to expiration (0DTE) positions, volatility products and a creative method for thinking about the Greeks.

World Investor Week: Join OCC & OIC in promoting investor education and financial protection. Explore

Option prices are driven by all market participants, whether that is a bank, a fund manager, a market maker, or an individual investor. The process of buying or selling an option begins when one of these market participants submits an order, such as a market order or a limit order, to their brokerage firm. The order then flows from the brokerage firm’s platform to an exchange. Once an exchange receives the order it is sorted by class, series, bids, offers and the desired execution price. Depending on the price, one of three outcomes could take place: One scenario is that the order is executed, and the fill is reported back to the investor. Another possibility is that the order may be placed in a queue based on the investor’s price, awaiting execution.  Another potential outcome is that if the order improves either the bid, by being the highest price a buyer is willing to pay for the option, or the offer (also known as the ask), by being the lowest price where a seller is willing to sell, it is displayed in the option chain and made available to all traders. The data in a typical option chain is constructed by Options Price Reporting Authority, LLC (“OPRA“) by collating prices from all options exchanges into the best bid and offer, also known as the National Best Bid and Offer (“NBBO”).  The number of active buyers and sellers generating bids and offers is often considered a measure of order flow, and the number or size of the bids and offers is viewed as an indicator of supply and demand. The bid size shows the demand to purchase a particular option at a given price while the ask size shows the supply of options for sale at the ask price. If the bid size is greater than the ask size, this may be an indication that the demand to buy those options is greater than the supply to sell the option.     When viewing an option chain quote, the spread between the bid and ask is as notable as the bid and the ask prices themselves. Investors may wonder whether trading volume drives the bid-ask spread or if the bid-ask spread drives trading volume. Although both ideas have merit, many factors can impact either narrow or wide bid-ask spreads, including economic events, anticipated news such as earning announcement, perceived trading risk, and competition of market participants. Even the width of the underlying asset’s bid-ask spread can impact the option’s bid-ask spread. For instance, a wide underlying bid-ask width may produce a wide bid-ask width in the corresponding options  Besides identifying the specific events that may impact the bid-ask spread, another consideration is the impact the bid-ask spread may have when entering and exiting a position. Depending on the bid-ask spread, and order type selected, the order may be exposed to what is known as slippage.  Slippage is the difference between the expected trading price and the actual traded price. Even though the word “slippage” may have a negative undertone, the trade outcome can result in a more favorable price (positive slippage). A worse-than-expected price would be negative slippage. Either way, wide bid-ask spreads may have more risk of slippage, whereas a narrow bid-ask spread may be less prone to slippage. Selecting the right order type that fits an investor’s specific risk tolerance can reduce slippage, but there are trade-offs to consider.       Investors generally choose between two order types with options. One is a market order, which is typically executed on the quoted offer price for a buy order and the quoted bid price for a sell order. Market orders may have a quick fill turnaround time, but they also can have a greater chance of experiencing slippage. Meanwhile, the other type of order, a limit order, may mitigate slippage. Still, although a limit-order involves the investor setting an execution price, it also requires the understanding that the order might not be executed at all if the limit price is never reached. The investor will need to consider these trade-offs on an individual basis.  For investors, developing an understanding of the bid-ask dynamic, using a balanced analysis of prices, the size of the bid-ask and the width of the spreads, may help determine the right order type for their projected outcome  Key Takeaways  When viewing an option chain, the bid is the highest price an investor is willing to pay, and the ask is the best price at which an investor is willing to sell.  The bid size and ask size is an aggregate number of option contracts available at those prices. Bid-ask size can be used to gain insight into the supply and demand of options. Slippage is the difference between the executed price of an option and the perceived theoretical fair value of that option. Slippage can be positive or negative.  

On Tuesday May 28, 2024, the highly anticipated settlement cycle conversion from T+2 to T+1 was rolled out. The products affected by this change include ‘transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange’ according to SEC’s Investor Bulletin announcement, click here. What is the settlement cycle? Simply put, it is the number of business days for a product transaction to be delivered to the buyer’s account and a payment to the seller’s account. The widely used term T+2 and the new T+1 is shorthand for ‘trade day (T) plus (+) business days (1 or 2) which indicates the amount of time needed for trades to be cleared and added to the individual accounts. The settlement cycle for stocks, ETFs and the other products is overseen by the National Securities Clearing Corporation (NSCC) a subsidiary of the Depository Trust & Clearing Corporation (DTCC).  In 2017, the SEC amended the post-trade settlement cycle from three business days (T+3) to two business days (T+2). The decision to reduce the process further to T+1 is rooted in advances in technology and efforts to reduce credit, market, and liquidity risks for investors. Option Trade Settlement  The settlement of an equity option trade is distinct from the settlement of equities.  Unlike an equities transaction in which an exchange-traded stock or unit is transferred from one party to another, an option trade either establishes a new option position or closes out an existing option position.  The creation or close out of an option position occurs near real time once OCC receives and processes a trade from an exchange.  Payment of the premium for an options trade is finalized the next trading day.    Option Exercise and Assignment Settlement When a buyer/holder of an equity options contract exercises their right to either buy (in the case of a call) or sell (in the case of a put) the shares underlying an option contract, the option exercise and assignment is processed by OCC and the settlement of shares is facilitated by NSCC whereby NSCC transfers the shares of the option deliverable from the delivering party to the receiving party and facilitates payment of the aggregate strike amount for the transfer of shares between the two parties. With the new T+1 settlement, the transfer process of the underlying shares of the option deliverable is settled on the next business day. In other words, the day after an exercise and the subsequent assignment, the deliverable settles in the investor’s account. 

For the third quarter of 2024, The Options Industry Council (OIC) is offering investors six all-new webinars, focusing on two key themes: strategies designed to potentially generate premium income and those created for hedging purposes.  Every OIC webinar during the quarter will be presented live. Plus, each session will be led by instructors with real-world options experience, enabling them to both present the materials and respond to questions from attendees in real time. In addition, all webinars will include information on the benefits as well as the risks of investing with exchange-listed options.  Two separate sessions are planned for each month of the quarter:  In July, premium income will be the topic, with an overview of credit vertical spreads to start the month, followed by a presentation on iron condors and iron butterflies.  For August, premium income for neutral outlooks will be central, with the first webinar of the month covering short straddles and short strangles, while the second discussion will be on covered combinations and covered ratio spreads.  Finally, September will feature two hedging topics, beginning with protective puts and closing with collars.  All OIC webinars are free to attend and require registration online. Plus, by signing up for any event, attendees will gain access to the entire OIC educational library, where all prior webinars can be reviewed on demand.  Register now on the OIC Events page. To help investors prepare in advance for the third-quarter webinars, explore OptionsEducation.org. The OIC website offers options-related courses, detailed strategy pages, videos, podcasts and much more. The following links may be especially useful for the third-quarter webinar series:   OCC Learning (Option Courses) Strategies Designed to Produce Income (Concept Review) Hedging Strategies Involving Options (Concept Review) Debit and Credit Verticals (Video Series) 

The life cycle of an option trade starts once an investor, with an approved option trading account, and who has placed an order for a trade receives a fill notification for an option order that was entered into a trading platform, routed to, and then subsequently filled on an options exchange. Even though that process may appear straightforward, the reality is more complex than the summary suggests.  With every one of the millions of options contracts traded per day, there are numerous required steps and participants operating behind the scenes to ensure that each contract makes it all the way through to settlement. An investor’s brokerage firm typically facilitates an option trade through an electronic trading platform that routes orders to an options exchange or to multiple exchanges. The exchange's primary role is to match orders between an options buyer and an options seller. Once the trade is matched and the order is filled, and confirmed by the brokerage firm, the transaction enters the settlement and clearing phase. During this phase, trade details are transmitted, funds are transferred between the buyer and the seller; and the Options Clearing Corporation (OCC) established the options position in its system. During the clearing and settlement process, OCC becomes the buyer to every seller and the seller to every buyer as the central counterparty (CCP), helping to safeguard the rights of buyers and ensure the obligations of sellers are met throughout the exercise and assignment process.  Exercise and Assignment   Equity and exchange-traded fund (ETF) options are generally American-style options which means they may be exercised at any time before their expiration date. This allows buyers the right to exercise at any time prior to expiration while option sellers may be called upon at any time to fulfill their obligations, if assigned.   Before a long option holder decides to exercise an option contract, there are number of factors to consider, including:  Before expiration: An American style option holder has the right to exercise an option before its expiration. Should they choose to do so, an option holder must submit an exercise notice to their brokerage firm along with instructions. These instructions are then relayed to OCC which in turn triggers the assignment process.  On expiration: OCC administers the automatic exercise process, which occurs when an option contract is a penny or more in-the-money. This procedure is also known as exercise-by-exception, or ex-by-ex. Even when expiring options meet these criteria, the options will not be automatically exercised if contrary instructions are received by OCC.   Contrary Exercise Advice: A long options holder has the right to exercise as well as the right to not exercise an options contract. This is especially important on an option’s expiration date when the ex-by-ex process is applied. The holder of a long in-the-money (ITM) option at expiration may decide not to exercise whereas the long out-of-the-money (OTM) option holder may decide to exercise their option contract. In either circumstance, a ‘contrary exercise’ notice instructing OCC that the option holder elects not to follow the Ex-by-Ex procedure must be submitted to the OCC by the defined time deadline.   Exercises Notices Generate Assignments When an option writer is assigned, they must fulfill the obligation associated with the option contract. To ensure fairness in the distribution of option assignments, OCC utilizes a random method to assign a clearing member firm with a corresponding short option position to the exercise of a long option position. The assigned clearing member will then utilize their own assignment method to allocate the assignment to individual accounts who are short these options. An assignment triggers the seller’s obligation to fulfill the terms of the contract by either selling (for a call) or buying (for a put) the underlying security at the strike price.    Every trade follows a journey from start to finish. In the world of options, understanding the process and the role of OCC beyond option buyers and sellers provides a perspective on the life cycle of an option from initiation through settlement including exercise and assignment. In essence, investors initiate trades, brokerage firms facilitate them, and clearinghouses provide clearing and settlement services.