Articles and Updates

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.    

During the second quarter of 2024, The Options Industry Council® will host a new round of educational

Ed Modla, Executive Director, Investor Education, OCC, and colleague Mark Benzaquen, Principal, Investor Education, OCC and OIC Instructor, traveled to Las Vegas, Nevada to attend the MoneyShow TradersExpo, February 21-23 at the iconic Paris Hotel.   MoneyShow/TradersExpo is a premier in-person event connecting industry professionals and attendees to provide timely investing and trading education, delivered by powerful experts who are best-selling authors, market analysts, portfolio managers, award-winning financial journalists, and newsletter editors. The event spans sectors including stocks, bonds, commodities, real estate, cryptocurrencies, alternative investments and more.     In The Exhibit Hall Mark and Ed set up shop in the exhibition hall at booth #605. Curious investors stopped by to learn more about OIC and asked questions on the mechanics of options.    On Stage  Mark gave a presentation about Stock Repair – a strategy designed to potentially recoup a portion of stock losses without additional cost or taking on additional risks.   Looking for a copy of Mark’s presentation deck or want to learn more about the stock repair strategy, or any other options strategy? Email us at options@theocc.com.   Frequently asked Questions: Is there a way to break down the stock repair strategy into more easily understood components? Absolutely. Some traders might look at the stock repair strategy as two strategies in one: namely the bull call spread and the covered call. From the bull call spread, the investor can benefit from rising share prices while the covered call can reduce the overall cost of the trade. When the two are combined, they can offer the opportunity to lower the breakeven point of the long stock position in the hopes of recouping losses at lower prices than the investor would normally realize when holding the stock outright. What is a potential benefit of this strategy? A benefit of the stock repair strategy vs. either of those scenarios is that the strategy aims to get back to even sooner than the “hold and hope” scenario and without additional risk or cost. While you can certainly buy more stock to average down your per share price, that requires more investing more capital into a company with falling share prices.  What is a risk of this strategy?   The primary risk in the stock repair strategy remains with the long stock itself. If share prices continue to decline, the investor still bears the risk of long stock and losses will compound.       Meeting Industry Peers While in Vegas, Mark took the opportunity to record a few segments for the OIC Wide World of Options podcast. Mark was joined by Dr. Alan Ellman, President, The Blue Collar Investor, Jay Soloff, Editor/Lead Options Analyst, Magnifi and Kerry Given aka “Dr. Duke,” Managing Director, Parkwood Capital.  Look out for these shows in the coming months. In the meantime, browse past episodes.   

Join OIC's free Q1 2024 webinars for insights into options, from terminology to Greeks.

FLEX options offer customizable terms, exchange-listed benefits, and OCC clearing.

OCC/OIC wins Benzinga Global Fintech "Educational Excellence" award for their dedication to providing innovative options education.

OIC's enhanced tools and calculators are live! Analyze options, visualize market impacts, and monitor stocks for free. Sign in or create an OIC account.

OIC is enhancing its options tools and calculators on OptionsEducation.org, offering new features like enhanced calculators and options monitors.

Skew measures implied volatility differences in options. Smile shows both OTM puts & calls elevated. Smirk has one side steeper due to market sentiment.

OIC's Q4 webinars cover volatility, ratio spreads, and index trading. Register for free access and expert-led options investing insights.

World Investor Week: Join OCC & OIC in promoting investor education and financial protection. Explore resources and education for a smarter investment journey.

Join OIC for new webinars in Q3 2023 on options strategies. Learn about condors, butterflies, spreads, and volatility strategies. Registration is free!

Understand 0DTE options and their significance on expiration day positions for investors at Options Education. Enhance your trading knowledge.

Prepare for Q2 2023 with OIC's free webinars. Learn income generation, hedging, and spread trading strategies. Register now and access valuable resources!

Prepare for OIC's upcoming educational webinars on options. Themes include Options Basics, Pricing, and Greeks. Join for free and enhance your knowledge.

Edward Modla, winner of the 2022 TradersWorld FinTech Award for "Best Options Educator" with over 20 years of financial services experience.

Join OCC and OIC in celebrating World Investor Week, starting October 3. Engage with educational resources like the ODD Quick Guide, volatility courses, podcasts on earnings, and tools for understanding options and their impact. Explore more at OCC Learning and OIC's on-demand webinars.

Enhance your options market knowledge with OIC's Q4 webinars. Topics include dividends, corporate actions, and position management. Register now!

Understanding trading halts' impact on options. Halt reasons, options' status, and exercise complexities explained.

Celebrate 30 years of options education with OIC. Explore our comprehensive learning resources for educated options investing. Download now!