January 4, 2024 • 21 mins
A New Year often brings with it new resolutions. If your resolution includes learning about options, The Options Industry Council and OIC’s Wide World of Options has you covered. In the first episode of 2024, host Mark Benzaquen explains the ins and outs of options fundamentals by defining options and discussing their potential uses. And as an added feature, Dave Nolan from OCC’s Member Services team joins the podcast to discuss OCC’s role in the marketplace.
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Episode Transcript
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(00:00):
You're listening to the Options Insider Radio Network, the home of the Options Podcast.
For more quality options programs, visit theoptionsinsider.com or search for Options Insider Radio Network
in your podcast provider of choice.
Listeners can also access all of our programming through our mobile app available on the iTunes
(00:22):
and Google Play stores.
Options programs are also available via live stream at mixler.com/options-insider.
That's mixlr.com/options-insider.
Don't forget to follow along with your favorite programs and submit your own questions for the host
set twitter.com/options, stocktwits.com/options, facebook.com/theoptionsinsider,
(00:50):
or via questions at theoptionsinsider.com.
This is the Options Industry Council's Wide World of Options.
Before we start today's show, listeners should know that options involve risks that are not
(01:11):
suitable for all investors.
Individuals should not enter into an options transaction until they have read and understood
the disclosure document, characteristics and risks of standardized options, available by
visiting theocc.com or by contacting your broker, any exchange on which options are traded,
or the Options Clearing Corporation at 125 South Franklin Street, number 1200 Chicago,
(01:34):
Illinois 60606.
The Options Industry Council is an industry resource provided by the Options Clearing
Corporation, collectively OCC.
Any strategies discussed are strictly for illustrative and educational purposes only
and are not to be construed as an endorsement or solicitation to buy or sell securities.
Commissions, fees, margins, interest and taxes have not been included in any of the examples
(01:57):
used in this show.
These costs impact the outcome of all stock and options transactions.
Consult your tax advisor about any potential consequences.
OIC was created in 1992 to educate investors and their financial advisors about the benefits
and risks of exchange traded equity options and the Wide World of Options radio show is
(02:18):
one of several resources investors can utilize to learn more about options.
Other resources OIC offers include webinars, articles and self-guided options related coursework.
For more information, check out www.optionseducation.org.
Now here's your host, Mark Benzoquin.
Hello everyone, happy new year and welcome to a new episode of OIC's Wide World of Options.
(02:50):
I'm your host, Mark Benzoquin and I'm so excited to kick off a new year of options
education and I also wanted to share a few programming changes going forward and give
some updates about a terrific new suite of tools that we have on our OIC website, optionseducation.org.
And I'll share those a little bit later in this episode.
As for programming, we're going to be making a few changes to the format that we've used
(03:14):
in the past.
While we'll continue to feature my fellow OIC instructors and a preview of upcoming OIC
webinars that we're going to be presenting, we're also going to feature industry guests
and talk about relevant and timely issues and topics to give you a better understanding
of the options industry as a whole and all that goes on behind the scenes.
(03:36):
Again we just might have a few other surprises as well.
So with that being said and to quote from Lessons in Chemistry, let's get started, shall
we?
Typically a new year, as most of you know, brings New Year's resolutions and if your
New Year's resolution includes learning about options, well, you've certainly come to the
right place because each new year OIC begins our webinar program by going back to the basics
(04:02):
and starting at the beginning with what are options and why do people use them?
Well in a nutshell, options are contracts and like most contracts, options convey certain
rights and obligations upon buyers and sellers.
For option buyers or option holders as they're also known, purchasing an option gives the
right to buy or sell stock at a specific price and within a specific period of time.
(04:27):
At specific price we call the strike price and the specific period of time we call the
expiration date.
For sellers, which we also call option writers, they incur the obligation to buy or sell that
stock at that strike price and within its expiration date.
The cost of these rights and obligations is known as the options premium and basically
(04:51):
it's the price buyers pay and sellers collect as a result of those very same rights and
obligations.
The premium is determined by market participants, whether they be individual investors, professional
market makers, hedge funds, etc. and it's subject to the basic economic principles of
supply and demand, meaning the more people that want options, the higher those option
(05:16):
prices are going to be.
Speaking of options, there's two different types.
We've got calls and puts.
When we purchase a call option, that is giving the buyer the right to buy or sell the underlying
asset and which for our purposes we're going to assume is going to be 100 shares of stock
(05:37):
or 100 shares of an ETF, also known as an exchange traded fund.
So buying a call option gives the buyer the right to buy the stock at the agreed upon
strike price and within that allotted expiration date.
Conversely, the call seller is then obligated to sell those shares to the buyer if called
(05:58):
upon to do so through a process by which we call exercise and assignment.
The other type of option that would be puts, a put buyer has the right to sell the stock
at the strike price and the put seller is obligated then to buy those shares, again,
if called upon to do so.
So really in their most simple form, options basically have four possibilities.
(06:22):
We can buy a call, we can buy a put, we can sell a call, we can sell a put.
Of course, we can combine two or more options or even pair it with stock for that matter
in a variety of ways in order to meet a variety of objectives, whether that objective is to
generate income, maybe mitigate portfolio risk.
(06:47):
People also use options to provide leverage and even there are strategies out there with
the options designed to be able to purchase stock at a discounted price.
So in other words, the flexibility and the versatility of options allow them to be used
in a number of ways and for a number of reasons.
(07:08):
So it would probably be easiest if we illustrate these concepts with an example.
So let's look at an example of a call buyer.
Let's assume that our investor is bullish on a particular stock and is trading for $75
a share on the market and our investor thinks that that share price is going to be increasing
over the next 60 days or so.
(07:31):
If they wanted to, they could simply buy the stock outright and purchase 100 shares, which
would cost $7,500.
If the stock goes up as expected, the investor makes money and if it goes down, they lose
money, pretty self-explanatory.
Alternately, the investor might look to buy a call option instead, which would give them
the right to buy the stock at a price of $75, let's say, any time over the next 60 days.
(07:57):
And for this right, they pay a quoted price of $3.
Since each standard option contract typically represents an interest in 100 shares, we'll
multiply that $3 premium by the standard contract multiplier of 100 and we get $300, which is
now not only our maximum investment, but it's also the maximum loss should the investor's
(08:20):
forecast prove incorrect.
If shares do increase as expected, the call buyer can exercise their right and purchase
shares for $75 a share.
Basically, they pay their strike price times 100, in this case, $7,500, which matches the
original share price of the stock.
But if shares are now currently trading for, say, $80, well then, the buyer's purchasing
(08:47):
stock at $75 a share, it's trading 80 in the market, so they've got a theoretical, unrealized
profit of $5 per share.
Of course, they paid $3 for that right.
That gets subtracted from our costs, so we have an unrealized gain of $2.
So if share prices do increase, the investor can turn around and exercise their contract.
(09:10):
If share prices don't increase, or maybe they don't increase by as much as the investor
was expecting, they can simply let that contract expire worthless and the $300 in premium that
they paid, that is going to be their maximum loss.
Now on the sell side, if we were selling a call, we're obligated to sell those shares
(09:30):
at $75.
If we get assigned, which is the other side of the coin when it comes to exercise, if
that investor gets assigned, they are then obligated to sell those shares at $75.
And for that obligation, for accepting that obligation, they retain that $3 premium that
(09:51):
they collected upfront when the trade was initiated.
Now obviously this is a very high level overview of options basics, but I'm going to be taking
a much deeper dive during my two upcoming presentations in January.
You can register for free on our optionseducation.org website under the upcoming events section.
And I should point out that each webinar presentation is recorded so you can watch it at any time
(10:17):
at your convenience.
And it also includes a downloadable collection of the slides used in that presentation.
Speaking of our website, I'm happy to announce that we've released a whole new suite of tools,
which includes new and updated calculators, a stock and options monitor, new probability
tools and much, much more.
So visit our website optionseducation.org to test drive our new tools and be sure to
(10:41):
reach out with any questions to our investor education team.
And with that, let's bring in our next guest, Dave Nolan from OCC's member services team.
Dave, welcome.
Thanks for joining me today.
Thanks for having me, Mark.
Excited to be here.
Oh, Dave, thank you.
Let me ask you, you've been in the business a long time.
Why don't we start out with a little bit of background?
(11:03):
How long you've been in the business?
How long you've been with OCC?
What your role is at OCC, et cetera?
How does that sound?
Sounds good.
All right, so here we are, 2024.
Happy new year to you, by the way.
How did you get your start in the business and how long have you been involved?
I got my start in the business from a friend of mine who I was just looking for a job.
(11:27):
And they said, "Well, we have an opening."
So I started as a runner on the CBOE trading floor in 1991, March 10th, 1991.
Oh, you remember the date?
It was always supposed to be a six-month little stand-around thing, but now 30-
30-plus years later?
30-plus years later, I've been still in the business.
I've been with OCC now for just over my eight-year anniversary.
(11:49):
Oh, terrific.
And is in just a couple days, as a matter of fact.
Interesting.
Congratulations.
Thank you.
So, yeah, just started out as a runner and just worked my way up through the system as
a trade checker, a phone clerk, a crowd clerk.
Worked mainly a lot of back office operations, doing balancing and working in different departments
of the company, just learning various aspects of the business and how I can service customers.
(12:13):
Okay, excellent.
And so now you've been with OCC going on your ninth year.
What - and you're with the member services team.
So tell me about that.
What's your role?
What does member services do?
How do they relate to the industry?
So I'm a manager within member services, and what I do is I just kind of help out the team
members and be able to make sure we can assist our customers.
(12:36):
Member services' role with OCC is that we are the customer service for the community
members who are primary customer-based.
And what we do is we assist them with any kind of concerns or needs or questions they
may have.
If they need to update some kind of information for their account, we will help accommodate
that.
If they have questions or concerns about some processing, we will answer any questions to
(13:00):
the best of our ability.
We can't answer every question, but we can answer most questions.
Okay.
So, and the clearing firms, those are the customers of OCC.
So those are stakeholders of OCC, is that right?
That is correct.
Okay.
And as part of our function member services, we provide certain data to our clearing firms
(13:23):
and maybe the public as well.
We assist them in the exercise and assignment process, which I want to talk about in a little
bit.
But let's talk about that data.
So when it comes to data, I know that we've got a host of free data on our website, www.theocc.com.
We also offer some free data on our OIC website as well.
(13:46):
But then OCC also provides data on a subscription basis mainly to our clearing firms.
On our website, for example, the free data includes volume statistics, open interest,
a series search where we can see all of the different strikes available for specific security,
(14:07):
the open interest on those strikes, et cetera, et cetera.
When it comes to our clearing firms, we provide clearing firm specific or clearing firm directed
data.
Is that right?
What would that look like?
So that would be correct.
The clearing firm specific and directed data would actually deal with trade activity, position
(14:28):
activity, or their position activity, position summary, exercise and assignment activity.
That's all directed and proprietary information that's directed to the clearing firm.
Something that's more general that's available to the clearing members is our price files.
So you're talking about these theoretical prices.
So I should state that options don't have closing prices.
(14:49):
So at the end of the day, we don't know that that option closed for say $2.95.
What OCC does is they calculate a theoretical value for every option contract.
That theoretical value, what we call a mark price, that's what we use to margin our clearing
firms.
Is that correct?
Is that how it works?
That is correct.
(15:10):
We do have a proprietary algorithm that does smooth out the pricing and that's what's
provided to the clearing members and that's what we use to calculate our margin requirements
for the customers.
And then other types of data you had mentioned clearing firm specific maybe shows their positions,
individual trades, et cetera.
You had mentioned exercise and assignment.
(15:30):
For those of you that are new to options, and I mentioned this a little bit earlier
in the podcast, exercise and assignment is the process by which a buyer fulfills the
right that they purchase when they buy an option contract and a seller fulfills the
obligation when called upon to do so.
So if I'm an option buyer, let's say I bought that call contract that we had talked about
(15:54):
earlier in this podcast, I wanted to exercise that call.
I would contact my clearing firm to let them know my desire to exercise or depending on
certain parameters that contract might be exercised automatically.
My clearing or trading firm then contacts OCC.
OCC then processes the assignment and sends it randomly out to a clearing firm.
(16:19):
So that's how exercise and assignment works from a buyer seller perspective.
Dave can you elaborate how OCC does everything?
So for example, if I exercise my call contract, OCC doesn't know that I'm exercising my contract.
They just know that my clearing firm has a customer who's exercising, right?
(16:41):
They look at the aggregate, not the individual, correct?
Correct because most of the customer accounts are held here in an omnibus basis.
So one customer account that could be say 100 lot could be 10 different customers who
hold 10 contracts each.
But all we receive is an exercise instruction from the clearing firm saying, "Mike, I want
(17:02):
to exercise 10 of this."
We don't know who it is, we just know that this is what they're asking us to do, so we
process it that way.
Okay.
Excellent information.
Certainly, I appreciate that.
Thank you.
Any other aspects of member services or aspects of the business that you want listeners to
(17:24):
know about?
Yeah, it's member services tries to service every entity that we have as our customer.
We try to help out as much as we can.
There's limitation to what we can do.
And one thing that is important is with the information memos.
Right, certainly.
With the information memos, whatever we post is the information that we know at that time.
(17:46):
And I know a lot of people would love for us to provide more additional information
to color into it.
But that is all the information that we know and that's...
Right, that's all that we can talk about.
And I should note again for those that might not be familiar, OCC provides what we call
an information memo.
And typically it's most relevant, at least in my opinion, when there's a corporate action.
(18:09):
There's a stock split or a merger or an anticipated merger or something like that.
And so we often get contacted from the public or from our clearing firms as to what's going
to happen.
So what Dave is referring to, OCC puts out this on our website and it explains the terms
that are known at that time based on that corporate action.
(18:33):
And unfortunately we are limited to discussing what is in that memo.
As Dave had mentioned, look, we would love to tell everybody what we think is going to
happen.
But as each corporate action is handled on a case-by-case basis, so thinking and knowing
are two vastly different concepts.
(18:55):
But that being said, Dave, excellent.
I really appreciate you joining me.
One last question for you.
So here we are, January 2024, a new year.
Are you a New Year's resolutions kind of guy?
I try to be, except for I break it on the second day of the year.
All right.
So for the first day of this year, your New Year's resolution was?
(19:16):
Lose a couple pounds.
And on the second day you gained five.
Five because I ate too much on the first day.
Yeah, excellent.
All right.
I like that.
That I can identify with.
So thank you.
Very, very excellent, Dave.
Much appreciated.
Thank you for joining me in the studio today.
And thanks to all of our listeners and supporters out there.
As always, please feel free to send us your questions via email at options@theocc.com
(19:40):
or live chat with us on our website.
Thanks again to all those listening.
And for all of us here at OIC and OCC, happy New Year.
Take care, everyone.
And we'll be talking with you again very soon.
You've been listening to the Options Industry Council's wide world of options.
If you have questions about anything you've heard on today's show, email options@theocc.com
(20:04):
or visit www.optionseducation.org and chat with OIC's investor education team.
Interested in connecting with OIC on social media?
Subscribe to the OIC YouTube channel.
Like them on Facebook.
Follow them on Twitter at options.edu and follow their page on LinkedIn.
Thanks for listening and be sure to tune in to the next episode of Wide World of Options.
(20:29):
You're listening to the Options Insider Radio Network, the home of the Options Podcast.
For more quality options programs, visit theoptionsinsider.com or search for Options Insider Radio Network
in your podcast provider of choice.
Listeners can also access all of our programming through our mobile app available on the iTunes
(20:54):
and Google Play stores.
Programs are also available via live stream at mixler.com/options-insider.
That's mixlr.com/options-insider.
Don't forget to follow along with your favorite programs and submit your own questions for the host
set twitter.com/options, stocktwits.com/options, facebook.com/theoptionsinsider
(21:23):
or via questions at theoptionsinsider.com.
You're listening to the Options Insider Radio Network, the home of the Options Podcast.
For more quality options programs, visit theoptionsinsider.com or search for Options Insider Radio Network
in your podcast provider of choice.
Listeners can also access all of our programming through our mobile app available on the iTunes
(00:22):
and Google Play stores.
Options programs are also available via live stream at mixler.com/options-insider.
That's mixlr.com/options-insider.
Don't forget to follow along with your favorite programs and submit your own questions for the host
set twitter.com/options, stocktwits.com/options, facebook.com/theoptionsinsider,
(00:50):
or via questions at theoptionsinsider.com.
This is the Options Industry Council's Wide World of Options.
Before we start today's show, listeners should know that options involve risks that are not
(01:11):
suitable for all investors.
Individuals should not enter into an options transaction until they have read and understood
the disclosure document, characteristics and risks of standardized options, available by
visiting theocc.com or by contacting your broker, any exchange on which options are traded,
or the Options Clearing Corporation at 125 South Franklin Street, number 1200 Chicago,
(01:34):
Illinois 60606.
The Options Industry Council is an industry resource provided by the Options Clearing
Corporation, collectively OCC.
Any strategies discussed are strictly for illustrative and educational purposes only
and are not to be construed as an endorsement or solicitation to buy or sell securities.
Commissions, fees, margins, interest and taxes have not been included in any of the examples
(01:57):
used in this show.
These costs impact the outcome of all stock and options transactions.
Consult your tax advisor about any potential consequences.
OIC was created in 1992 to educate investors and their financial advisors about the benefits
and risks of exchange traded equity options and the Wide World of Options radio show is
(02:18):
one of several resources investors can utilize to learn more about options.
Other resources OIC offers include webinars, articles and self-guided options related coursework.
For more information, check out www.optionseducation.org.
Now here's your host, Mark Benzoquin.
Hello everyone, happy new year and welcome to a new episode of OIC's Wide World of Options.
(02:50):
I'm your host, Mark Benzoquin and I'm so excited to kick off a new year of options
education and I also wanted to share a few programming changes going forward and give
some updates about a terrific new suite of tools that we have on our OIC website, optionseducation.org.
And I'll share those a little bit later in this episode.
As for programming, we're going to be making a few changes to the format that we've used
(03:14):
in the past.
While we'll continue to feature my fellow OIC instructors and a preview of upcoming OIC
webinars that we're going to be presenting, we're also going to feature industry guests
and talk about relevant and timely issues and topics to give you a better understanding
of the options industry as a whole and all that goes on behind the scenes.
(03:36):
Again we just might have a few other surprises as well.
So with that being said and to quote from Lessons in Chemistry, let's get started, shall
we?
Typically a new year, as most of you know, brings New Year's resolutions and if your
New Year's resolution includes learning about options, well, you've certainly come to the
right place because each new year OIC begins our webinar program by going back to the basics
(04:02):
and starting at the beginning with what are options and why do people use them?
Well in a nutshell, options are contracts and like most contracts, options convey certain
rights and obligations upon buyers and sellers.
For option buyers or option holders as they're also known, purchasing an option gives the
right to buy or sell stock at a specific price and within a specific period of time.
(04:27):
At specific price we call the strike price and the specific period of time we call the
expiration date.
For sellers, which we also call option writers, they incur the obligation to buy or sell that
stock at that strike price and within its expiration date.
The cost of these rights and obligations is known as the options premium and basically
(04:51):
it's the price buyers pay and sellers collect as a result of those very same rights and
obligations.
The premium is determined by market participants, whether they be individual investors, professional
market makers, hedge funds, etc. and it's subject to the basic economic principles of
supply and demand, meaning the more people that want options, the higher those option
(05:16):
prices are going to be.
Speaking of options, there's two different types.
We've got calls and puts.
When we purchase a call option, that is giving the buyer the right to buy or sell the underlying
asset and which for our purposes we're going to assume is going to be 100 shares of stock
(05:37):
or 100 shares of an ETF, also known as an exchange traded fund.
So buying a call option gives the buyer the right to buy the stock at the agreed upon
strike price and within that allotted expiration date.
Conversely, the call seller is then obligated to sell those shares to the buyer if called
(05:58):
upon to do so through a process by which we call exercise and assignment.
The other type of option that would be puts, a put buyer has the right to sell the stock
at the strike price and the put seller is obligated then to buy those shares, again,
if called upon to do so.
So really in their most simple form, options basically have four possibilities.
(06:22):
We can buy a call, we can buy a put, we can sell a call, we can sell a put.
Of course, we can combine two or more options or even pair it with stock for that matter
in a variety of ways in order to meet a variety of objectives, whether that objective is to
generate income, maybe mitigate portfolio risk.
(06:47):
People also use options to provide leverage and even there are strategies out there with
the options designed to be able to purchase stock at a discounted price.
So in other words, the flexibility and the versatility of options allow them to be used
in a number of ways and for a number of reasons.
(07:08):
So it would probably be easiest if we illustrate these concepts with an example.
So let's look at an example of a call buyer.
Let's assume that our investor is bullish on a particular stock and is trading for $75
a share on the market and our investor thinks that that share price is going to be increasing
over the next 60 days or so.
(07:31):
If they wanted to, they could simply buy the stock outright and purchase 100 shares, which
would cost $7,500.
If the stock goes up as expected, the investor makes money and if it goes down, they lose
money, pretty self-explanatory.
Alternately, the investor might look to buy a call option instead, which would give them
the right to buy the stock at a price of $75, let's say, any time over the next 60 days.
(07:57):
And for this right, they pay a quoted price of $3.
Since each standard option contract typically represents an interest in 100 shares, we'll
multiply that $3 premium by the standard contract multiplier of 100 and we get $300, which is
now not only our maximum investment, but it's also the maximum loss should the investor's
(08:20):
forecast prove incorrect.
If shares do increase as expected, the call buyer can exercise their right and purchase
shares for $75 a share.
Basically, they pay their strike price times 100, in this case, $7,500, which matches the
original share price of the stock.
But if shares are now currently trading for, say, $80, well then, the buyer's purchasing
(08:47):
stock at $75 a share, it's trading 80 in the market, so they've got a theoretical, unrealized
profit of $5 per share.
Of course, they paid $3 for that right.
That gets subtracted from our costs, so we have an unrealized gain of $2.
So if share prices do increase, the investor can turn around and exercise their contract.
(09:10):
If share prices don't increase, or maybe they don't increase by as much as the investor
was expecting, they can simply let that contract expire worthless and the $300 in premium that
they paid, that is going to be their maximum loss.
Now on the sell side, if we were selling a call, we're obligated to sell those shares
(09:30):
at $75.
If we get assigned, which is the other side of the coin when it comes to exercise, if
that investor gets assigned, they are then obligated to sell those shares at $75.
And for that obligation, for accepting that obligation, they retain that $3 premium that
(09:51):
they collected upfront when the trade was initiated.
Now obviously this is a very high level overview of options basics, but I'm going to be taking
a much deeper dive during my two upcoming presentations in January.
You can register for free on our optionseducation.org website under the upcoming events section.
And I should point out that each webinar presentation is recorded so you can watch it at any time
(10:17):
at your convenience.
And it also includes a downloadable collection of the slides used in that presentation.
Speaking of our website, I'm happy to announce that we've released a whole new suite of tools,
which includes new and updated calculators, a stock and options monitor, new probability
tools and much, much more.
So visit our website optionseducation.org to test drive our new tools and be sure to
(10:41):
reach out with any questions to our investor education team.
And with that, let's bring in our next guest, Dave Nolan from OCC's member services team.
Dave, welcome.
Thanks for joining me today.
Thanks for having me, Mark.
Excited to be here.
Oh, Dave, thank you.
Let me ask you, you've been in the business a long time.
Why don't we start out with a little bit of background?
(11:03):
How long you've been in the business?
How long you've been with OCC?
What your role is at OCC, et cetera?
How does that sound?
Sounds good.
All right, so here we are, 2024.
Happy new year to you, by the way.
How did you get your start in the business and how long have you been involved?
I got my start in the business from a friend of mine who I was just looking for a job.
(11:27):
And they said, "Well, we have an opening."
So I started as a runner on the CBOE trading floor in 1991, March 10th, 1991.
Oh, you remember the date?
It was always supposed to be a six-month little stand-around thing, but now 30-
30-plus years later?
30-plus years later, I've been still in the business.
I've been with OCC now for just over my eight-year anniversary.
(11:49):
Oh, terrific.
And is in just a couple days, as a matter of fact.
Interesting.
Congratulations.
Thank you.
So, yeah, just started out as a runner and just worked my way up through the system as
a trade checker, a phone clerk, a crowd clerk.
Worked mainly a lot of back office operations, doing balancing and working in different departments
of the company, just learning various aspects of the business and how I can service customers.
(12:13):
Okay, excellent.
And so now you've been with OCC going on your ninth year.
What - and you're with the member services team.
So tell me about that.
What's your role?
What does member services do?
How do they relate to the industry?
So I'm a manager within member services, and what I do is I just kind of help out the team
members and be able to make sure we can assist our customers.
(12:36):
Member services' role with OCC is that we are the customer service for the community
members who are primary customer-based.
And what we do is we assist them with any kind of concerns or needs or questions they
may have.
If they need to update some kind of information for their account, we will help accommodate
that.
If they have questions or concerns about some processing, we will answer any questions to
(13:00):
the best of our ability.
We can't answer every question, but we can answer most questions.
Okay.
So, and the clearing firms, those are the customers of OCC.
So those are stakeholders of OCC, is that right?
That is correct.
Okay.
And as part of our function member services, we provide certain data to our clearing firms
(13:23):
and maybe the public as well.
We assist them in the exercise and assignment process, which I want to talk about in a little
bit.
But let's talk about that data.
So when it comes to data, I know that we've got a host of free data on our website, www.theocc.com.
We also offer some free data on our OIC website as well.
(13:46):
But then OCC also provides data on a subscription basis mainly to our clearing firms.
On our website, for example, the free data includes volume statistics, open interest,
a series search where we can see all of the different strikes available for specific security,
(14:07):
the open interest on those strikes, et cetera, et cetera.
When it comes to our clearing firms, we provide clearing firm specific or clearing firm directed
data.
Is that right?
What would that look like?
So that would be correct.
The clearing firm specific and directed data would actually deal with trade activity, position
(14:28):
activity, or their position activity, position summary, exercise and assignment activity.
That's all directed and proprietary information that's directed to the clearing firm.
Something that's more general that's available to the clearing members is our price files.
So you're talking about these theoretical prices.
So I should state that options don't have closing prices.
(14:49):
So at the end of the day, we don't know that that option closed for say $2.95.
What OCC does is they calculate a theoretical value for every option contract.
That theoretical value, what we call a mark price, that's what we use to margin our clearing
firms.
Is that correct?
Is that how it works?
That is correct.
(15:10):
We do have a proprietary algorithm that does smooth out the pricing and that's what's
provided to the clearing members and that's what we use to calculate our margin requirements
for the customers.
And then other types of data you had mentioned clearing firm specific maybe shows their positions,
individual trades, et cetera.
You had mentioned exercise and assignment.
(15:30):
For those of you that are new to options, and I mentioned this a little bit earlier
in the podcast, exercise and assignment is the process by which a buyer fulfills the
right that they purchase when they buy an option contract and a seller fulfills the
obligation when called upon to do so.
So if I'm an option buyer, let's say I bought that call contract that we had talked about
(15:54):
earlier in this podcast, I wanted to exercise that call.
I would contact my clearing firm to let them know my desire to exercise or depending on
certain parameters that contract might be exercised automatically.
My clearing or trading firm then contacts OCC.
OCC then processes the assignment and sends it randomly out to a clearing firm.
(16:19):
So that's how exercise and assignment works from a buyer seller perspective.
Dave can you elaborate how OCC does everything?
So for example, if I exercise my call contract, OCC doesn't know that I'm exercising my contract.
They just know that my clearing firm has a customer who's exercising, right?
(16:41):
They look at the aggregate, not the individual, correct?
Correct because most of the customer accounts are held here in an omnibus basis.
So one customer account that could be say 100 lot could be 10 different customers who
hold 10 contracts each.
But all we receive is an exercise instruction from the clearing firm saying, "Mike, I want
(17:02):
to exercise 10 of this."
We don't know who it is, we just know that this is what they're asking us to do, so we
process it that way.
Okay.
Excellent information.
Certainly, I appreciate that.
Thank you.
Any other aspects of member services or aspects of the business that you want listeners to
(17:24):
know about?
Yeah, it's member services tries to service every entity that we have as our customer.
We try to help out as much as we can.
There's limitation to what we can do.
And one thing that is important is with the information memos.
Right, certainly.
With the information memos, whatever we post is the information that we know at that time.
(17:46):
And I know a lot of people would love for us to provide more additional information
to color into it.
But that is all the information that we know and that's...
Right, that's all that we can talk about.
And I should note again for those that might not be familiar, OCC provides what we call
an information memo.
And typically it's most relevant, at least in my opinion, when there's a corporate action.
(18:09):
There's a stock split or a merger or an anticipated merger or something like that.
And so we often get contacted from the public or from our clearing firms as to what's going
to happen.
So what Dave is referring to, OCC puts out this on our website and it explains the terms
that are known at that time based on that corporate action.
(18:33):
And unfortunately we are limited to discussing what is in that memo.
As Dave had mentioned, look, we would love to tell everybody what we think is going to
happen.
But as each corporate action is handled on a case-by-case basis, so thinking and knowing
are two vastly different concepts.
(18:55):
But that being said, Dave, excellent.
I really appreciate you joining me.
One last question for you.
So here we are, January 2024, a new year.
Are you a New Year's resolutions kind of guy?
I try to be, except for I break it on the second day of the year.
All right.
So for the first day of this year, your New Year's resolution was?
(19:16):
Lose a couple pounds.
And on the second day you gained five.
Five because I ate too much on the first day.
Yeah, excellent.
All right.
I like that.
That I can identify with.
So thank you.
Very, very excellent, Dave.
Much appreciated.
Thank you for joining me in the studio today.
And thanks to all of our listeners and supporters out there.
As always, please feel free to send us your questions via email at options@theocc.com
(19:40):
or live chat with us on our website.
Thanks again to all those listening.
And for all of us here at OIC and OCC, happy New Year.
Take care, everyone.
And we'll be talking with you again very soon.
You've been listening to the Options Industry Council's wide world of options.
If you have questions about anything you've heard on today's show, email options@theocc.com
(20:04):
or visit www.optionseducation.org and chat with OIC's investor education team.
Interested in connecting with OIC on social media?
Subscribe to the OIC YouTube channel.
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Follow them on Twitter at options.edu and follow their page on LinkedIn.
Thanks for listening and be sure to tune in to the next episode of Wide World of Options.
(20:29):
You're listening to the Options Insider Radio Network, the home of the Options Podcast.
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(21:23):
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