Investments, tenth edition

20.2 

  The Options Clearing Corporation 

 The Options Clearing Corporation (OCC), the clearinghouse for options trading, is jointly 

owned by the exchanges on which stock options are traded. Buyers and sellers of options 

who agree on a price will strike a deal. At this point, the OCC steps in. The OCC places 

itself between the two traders, becoming the effective buyer of the option from the writer 

and the effective writer of the option to the buyer. All individuals, therefore, deal only with 

the OCC, which effectively guarantees contract performance. 

 When an option holder exercises an option, the OCC arranges for a member firm with 

clients who have written that option to make good on the option obligation. The mem-

ber firm selects from its clients who have written that option to fulfill the contract. The 

selected client must deliver 100 shares of stock at a price equal to the exercise price for 

each call option contract written or must purchase 100 shares at the exercise price for each 

put option contract written. 

 Because the OCC guarantees contract performance, it requires option writers to post 

margin to guarantee that they can fulfill their contract obligations. The margin required is 

determined in part by the amount by which the option is in the money, because that value 

is an indicator of the potential obligation of the option writer. When the required margin 

exceeds the posted margin, the writer will receive a margin call. In contrast, the holder of 

the option need not post margin because the holder will exercise the option only if it is 

profitable to do so. After purchase of the option, no further money is at risk. 

 Margin requirements are determined in part by the other securities held in the investor’s 

portfolio. For example, a call option writer owning the stock against which the option is 

written can satisfy the margin requirement simply by allowing a broker to hold that stock 

in the brokerage account. The stock is then guaranteed to be available for delivery should 

the call option be exercised. If the underlying security is not owned, however, the margin 

requirement is determined by the value of the underlying security as well as by the amount 

by which the option is in or out of the money. Out-of-the-money options require less mar-

gin from the writer, for expected payouts are lower.