Options Clearing Corporation

The Options Clearing Corporation performs which of the following functions for listed options?

1. A.It sets the premium at which each listed option trades.Premiums are determined by market supply and demand, not by the OCC.
2. B.It supervises the sales practices of registered representatives who recommend options.Sales practice supervision rests with the firm and its self-regulatory organization.
3. C.It issues and guarantees every listed option contract and processes exercise and assignment.Correct. The OCC is the issuer and guarantor standing between every buyer and every writer.
4. D.It insures option holders against loss if the underlying stock moves against them.The OCC guarantees contract performance, not investment outcomes.

Why: The Options Clearing Corporation issues every listed option, guarantees performance by becoming the buyer to every seller and the seller to every buyer, standardizes contract terms, and processes and assigns exercise notices to clearing members. Because the OCC stands between the parties, an option holder does not depend on the creditworthiness of any individual writer. The OCC does not set option premiums, which are determined by supply and demand in the marketplace.

What role does the Options Clearing Corporation play in listed options trading?

1. A.It operates the exchange floor on which listed equity options are quoted and traded.Wrong. Trading venues are the exchanges; this entity sits behind them in the clearing process.
2. B.It sets the premium at which each listed option series opens for trading each session.Wrong. Premiums are set by supply and demand in the market, not administratively by a clearing organisation.
3. C.It issues every listed option and guarantees performance, becoming buyer to each seller and seller to each buyer.Correct. That interposition is what makes positions closeable without depending on the original counterparty.
4. D.It maintains the margin accounts of individual options customers and issues their maintenance calls.Wrong. Customer margin accounts are maintained by the customer's own broker-dealer.

Why: The OCC issues every listed option and stands as the guarantor of performance on each contract, interposing itself between buyer and seller so that neither depends on the other's creditworthiness. Once a trade is matched, the OCC becomes the buyer to every seller and the seller to every buyer, which is what makes an option position transferable and closeable without tracing the original counterparty. It also processes exercises and assignments, allocating an exercise notice to a clearing member with a matching short position. Without a central guarantor, an option holder's right to exercise would be worth only as much as the particular writer's ability to pay.

An adviser explains to a client why a modest option premium can produce a very large percentage gain or an equally large percentage loss. The reason is that

1. A.options are exempt from the transaction costs that apply to share dealings.Wrong. Costs affect the net result but create no magnification of any price move.
2. B.the Options Clearing Corporation guarantees the buyer a minimum return.Wrong. That guarantee covers performance of the contract and promises no return of any size.
3. C.the premium commits a small amount while controlling a far larger exposure.Correct. The ratio between amount committed and value controlled is what magnifies both outcomes.
4. D.option premiums are revalued only at expiration rather than continuously.Wrong. Listed options are priced continuously in the market throughout their life.

Why: Leverage in an option comes from the gap between the amount committed and the amount of underlying value the contract controls. A small premium gives exposure to the full move on a much larger position, so a modest percentage change in the underlying translates into a very large percentage change in the value of the premium. The same arithmetic works in reverse, and the buyer can lose the entire amount committed on a move that would barely register for a shareholder. Understanding that ratio is what makes the risk of the position intelligible to a client.

Listed options are issued and guaranteed by the:

1. A.Federal ReserveThe Fed conducts monetary policy and supervises banks; it does not stand behind private derivative contracts. Guaranteeing option performance requires a clearinghouse willing to become counterparty to every trade.
2. B.FDICFDIC insurance covers bank deposits, and securities sit explicitly outside that protection. An option is a contract on a security, so deposit insurance never reaches it.
3. C.SECThe SEC oversees the options markets and approves their rules, which is what makes this feel close. Regulating is not guaranteeing: the SEC never becomes a party to a trade and assumes no performance risk.
4. D.Options Clearing Corporation (OCC)Correct - the OCC is the options guarantor.

Why: The Options Clearing Corporation (OCC) issues and guarantees listed options.