Understanding Equity Options - The Options Clearing Corporation

The purpose of this booklet is to provide an introductoryunderstanding of equity options and how theycan be used. Options are also traded on a wide varietyof indexes, on U.S. Treasury rates, and on foreigncurrencies; information on these option products isnot included in this booklet but can be obtained bycontacting your broker or the exchanges on whichthese options are listed. U.S. option exchanges seekto provide competitive, liquid, and orderly marketsfor the purchase and sale of standardized options. Alloption contracts traded on U.S. securities exchangesare issued, guaranteed and cleared by OCC. OCCis a registered clearing corporation with the SECand plays a critical role in the U.S. capital markets asthe exclusive clearinghouse for exchange-traded options.OCC’s conservative financial and proceduralsafeguards, substantial and readily available financialresources, and its members’ mutual incentives protectthe organization from settlement losses.This introductory booklet should be read inconjunction with the option disclosure document,titled Characteristics and Risks of StandardizedOptions, which outlines the purposes and risks ofoption transactions. Despite their many benefits,options are not suitable for all investors. Individualsshould not enter into option transactions untilthey have read and understood the risk disclosuredocument which can be obtained from their broker,any of the options exchanges, or OCC. It must benoted that, despite the efforts of each exchange toprovide liquid markets, under certain conditions itmay be difficult or impossible to liquidate an optionposition. Please refer to the disclosure documentfor further discussion on this risk and other risks intrading equity options. In addition, margin requirements,transaction and commission costs, and taxramifications of buying or selling options should bediscussed thoroughly with a broker and/or tax advisorbefore engaging in option transactions.Note: For the sake of simplicity, the calculations of profit andloss amounts in this booklet do not account for the impact ofcommissions, transaction costs and taxes.4