Who Actually Issues a U.S. Listed Option?

A common question among market participants is who issues U.S. listed options. Unlike traditional shares, which are issued directly by a corporation, U.S. listed options originate from a different source. This article clarifies the issuer of U.S. listed options and explains the mechanisms supporting their creation and trading.

Understanding U.S. Listed Options

A U.S. listed option is a standardized contract granting the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a certain date. These financial instruments derive their value from the price movements of an underlying security, most commonly a stock. Each contract specifies a strike price and an expiration date.

Options are traded on regulated exchanges. There are two primary types: call options, which give the right to buy, and put options, which give the right to sell. These contracts typically represent 100 shares of the underlying asset, and the buyer pays a premium to the seller for this right.

The Role of the Options Clearing Corporation (OCC)

The primary issuer and guarantor of all U.S. listed options is the Options Clearing Corporation (OCC). Established in 1973, the OCC operates as an equity derivatives clearing organization, working under the jurisdiction of the U.S. Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). Its central role involves standardizing option contracts, clearing trades, and guaranteeing the performance of every option contract.

The OCC achieves this guarantee through a process known as novation. In novation, the OCC steps in as the central counterparty for every trade, becoming the buyer to every seller and the seller to every buyer. This mechanism eliminates counterparty risk between traders, ensuring that the obligations of the option contract are fulfilled regardless of the financial stability of the original buyer or seller. The OCC’s robust three-tiered safeguard system, which includes stringent membership qualifications for clearing members, member margin deposits, and contributions to a clearing fund, further supports its role as a guarantor. This structure makes the OCC the de facto issuer, as it stands behind every contract.

How Options Are Created and Listed

U.S. listed options are not pre-issued by a single entity like company shares. Instead, they are generated on demand by the market when a market participant initiates an opening sell order. For example, when an investor “writes” or “sells to open” a call or put option, a new contract is created. This process occurs on regulated exchanges, where market makers provide liquidity.

The OCC steps in as the counterparty to these newly created contracts through novation. This ensures that options generated by market activity are standardized and guaranteed by the OCC. The exchanges and regulatory bodies set specific criteria for stocks to be “optionable,” including requirements for publicly held shares, number of shareholders, trading volume, and share price, ensuring a liquid and stable market for these derivatives.

Distinction from Company-Issued Securities

It is a common misconception that the company whose stock underlies an option issues the option itself. Companies issue their own shares of common stock, representing ownership, and may also issue other corporate securities like bonds. These corporate securities are direct financial obligations or ownership stakes in the issuing entity.

U.S. listed options are derivative financial instruments. They are not issued by the underlying company, nor do they represent a direct claim on the company’s assets or earnings. Instead, they are contracts created and traded within the financial market, with their performance guaranteed by the Options Clearing Corporation. This distinction shows that listed options are a product of the derivatives market and clearing infrastructure, distinct from corporate finance of the underlying companies.