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Options Clearing Corporation: Guaranteeing Our Options Trades

Covered call writing and selling cash-secured puts involves investing our hard-earned money. Did you ever wonder who guarantees these trades? It’s not our broker or even our broker’s clearing firm. It’s the Options Clearing Corporation or the OCC.

This is an organization that acts as both the issuer and guarantor for option and futures contracts. The Options Clearing Corporation operates under the jurisdiction of the U.S. Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). Under its SEC jurisdiction, the OCC clears transactions for put and call options, stock indexes, foreign currencies, interest rate composites and single-stock futures. It is the ultimate resource in buy/sell option transactions as well as exercise and the assignment. In effect, The OCC guarantees every trade.

Let’s say that John buys option A through broker B. Broker B then submits the trade to clearing firm C which then sends the trade information to the OCC.

Meanwhile, Ann, an option seller (possibly a market-maker) submits her trade to clearing firm D which also sends the trade information to the OCC. The OCC then matches up the two trades. Now what if John, the option buyer, wants to exercise the option and own the underlying shares but Ann, the option seller, wants to buy the option to close her position? Both trades then go from broker to clearing firm and to the OCC. The OCC  will then locate the appropriate customer who was short the option to then deliver the shares to John’s clearing firm and then to John as well as a different appropriate customer to take the other side of Ann’s trade. The process of exercise and assignment is done either randomly or first in, first out (FIFO) where the oldest inventory is sold to the most recent buyer. Here’s a flow chart showing how these trades are executed:

how options trades are executed

Options Clearing Corporation flow chart

 

Many retail investors frequently wonder what happens to the option buyer who bought the contracts we sold and then bought back. The purpose of this article is to demonstrate how the system works to accommodate both buyers and sellers and therefore guarantee all trades executed.

 

Next live seminar:

Monday, October 27, 2014

Austin, Texas

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Spain, France, Italy, Turkey and Greece then back to the US

 

Leaning Tower in Pisa, Italy

Leaning Tower in Pisa, Italy

Market tone

Worries over the European economies negatively impacted US markets this past week. Federal Reserve officials are lowering forecasts for US economic growth as a result of disappointing growth in Europe, Japan and China that could slow US exports. Along with these concerns is the fact that a strengthening US dollar which leads to higher prices abroad will also negatively impact US exports:

  • In the Fed minutes from the FOMC meeting from September 16-17, there was a discussion of removing the language “considerable time”  when referencing the time frame the central bank plans to keep short-term interest rates near zero
  • Initial jobless claims for the week ending October 4th came in at 287,000, below the 295,000 anticipated by analysts
  • In August, consumer credit rose by $13.5 billion, a 5.1% annualized rate, the smallest increase since November, 2013

For the week, the S&P 500 dropped by 3.1%, for a year-to-date return of 4.8%, including dividends.

 

Summary

IBD: Market in correction

GMI: 1/6- Sell signal since market close on September 26, 2014

BCI: This site is anticipating a very strong earnings season  but is concerned about recent geo-political and global economic factors that may influence investors in the short term. Therefore, despite being bullish on our economy and on the upcoming earnings season, I am taking a cautious approach in all new positions and favoring only in-the-money strikes for all new positions until our markets stabilize.

Wishing you the best in investing,

Alan (alan@thebluecollarinvestor.com)

www.thebluecollarinvestor.com

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

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7 Responses to “Options Clearing Corporation: Guaranteeing Our Options Trades”

  1. Barry B October 11, 2014 12:01 pm #

    StockScouter update:

    Some news on StockScouter from Verus Analytics, the StockScouter data provider to MSN…

    “Verus Analytics Statement on StockScouter:
    We have been informed by Microsoft that StockScouter is still under consideration for inclusion in the new MSN Money website. Therefore, it is important for Microsoft to hear from StockScouter users. Please use their Feedback link, which can be found by clicking on the gear icon on the top right corner of the MSN Money website. We appreciate your interest in StockScouter.”

    We will keep you updated as developments occur.

    Best,

    Barry and The BCI Teamn

  2. Barry B October 11, 2014 3:48 pm #

    Premium Members,
    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 10-10-14.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
    http://www.youtube.com/user/BlueCollarInvestor

    Since we are entering Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
    http://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    Best,
    Barry and The BCI Team

  3. Barry B October 12, 2014 6:19 pm #

    Premium Members,

    There have been a few questions that have come in over the last few months regarding the different sections of the Weekly Report. Just to make sure…your stock selection decisions should be made using the data in the second section…the “Running List”. The data in the first section is used to determine if a stock will make it to the “Running List”.

    Once a stock passes the screening process and makes it to the “Running List”, we then provide the statistical data to help you select the stocks that best meet your risk profile and portfolio needs.

    Best,

    Barry and The Blue Collar Investor Team

  4. Sean Green October 13, 2014 2:01 pm #

    Make a trip to London/UK, so we can have drink. or two together
    that would be great to meet you in person.
    sean

    • Alan Ellman October 15, 2014 6:41 am #

      Sean,

      That’s very kind of you. I’ve been to London twice and enjoyed both trips very much. For now, it’s off to Venice, Italy and then home to the US. I’ll have to take a rain check.

      Alan

  5. Alan Ellman October 15, 2014 6:36 am #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates. With volatility up and the market down, notice how well the inverse ETFs have been performing. This site is anticipating a favorable upcoming earnings season.

    For your convenience, here is the link to login to the premium site:

    http://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    http://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  6. Barry B October 18, 2014 2:31 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 10-17-14.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
    http://www.youtube.com/user/BlueCollarInvestor

    Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
    http://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    Best,
    Barry and The BCI Team

    Your comment is awaiting moderation.

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