Who Actually Issues a US Listed Option Contract?

US-listed option contracts are financial derivatives that grant the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price by a certain date. A common misunderstanding exists that the company whose stock underlies the option contract is responsible for its issuance. However, for listed options traded on exchanges, the underlying company generally does not play a role in their creation or guarantee. Instead, a specialized entity and the broader market infrastructure are involved in bringing these contracts into existence and ensuring their integrity.

The Central Role of the Options Clearing Corporation (OCC)

The Options Clearing Corporation (OCC) serves as the sole issuer and guarantor of all listed options contracts in the United States. The OCC operates as a central clearinghouse, promoting stability and market integrity within the equity derivatives market. It functions under the jurisdiction of both the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC), ensuring regulatory oversight for its operations.

The OCC’s primary function involves interposing itself between every buyer and every seller of an option contract, effectively becoming the buyer to every seller and the seller to every buyer. This structure, known as central counterparty (CCP) clearing, eliminates counterparty risk for market participants. Traders are always dealing with the OCC, rather than an individual option writer, which provides a high degree of assurance that contractual obligations will be fulfilled.

The OCC’s central role ensures the integrity and stability of the options market. By guaranteeing performance, the OCC ensures that if one party to an options contract defaults, it steps in to fulfill the contract on their behalf. The OCC also maintains financial integrity through margin requirements imposed on option sellers, which act as safeguards to cover potential losses.

Standardization and Exchange Listing

While the Options Clearing Corporation issues and guarantees options, options exchanges play a role in standardizing and listing these contracts. Exchanges like the Cboe Options Exchange, NYSE Arca, and NASDAQ OMX PHLX provide the venues where these standardized options contracts are traded. They ensure that all listed options have uniform specifications, such as fixed strike prices, expiration dates, and contract sizes, typically covering 100 shares of the underlying asset.

This standardization makes options fungible, meaning they are interchangeable and easily traded by different participants. It allows for efficient price discovery and contributes significantly to market liquidity, as any buyer can be matched with any seller of a similar contract. Exchanges also define expiration cycles, ranging from weekly to monthly, and even longer-dated options known as LEAPS, to meet diverse trading strategies.

Options exchanges do not “issue” options in the same way the OCC does, but they provide the regulated environment necessary for their creation and trading. The exchanges also oversee the trading process, ensuring transparency by posting real-time quotes and market data for public access.

The Creation of Options Contracts

A new options contract comes into existence through a process driven by market participants, rather than being “issued” by the underlying company. An option is “created” or “written” when a market participant, such as a market maker or an individual investor, sells an option contract without first owning it. This action opens a short position for the seller, incurring an obligation to the buyer.

At the precise moment an option is written and a buyer takes the other side of the trade, the Options Clearing Corporation immediately steps in as the central counterparty. The OCC effectively “issues” the obligation to the buyer and simultaneously takes on the obligation from the seller, guaranteeing the performance of the contract.

The creation of these contracts is a direct response to market demand, driven by the willingness of participants to “write” or sell options. For example, if an investor believes a stock’s price will remain stable or decline, they might write a call option to generate income from the premium received. This action brings a new contract into circulation, instantly backed by the OCC’s guarantee, facilitating a liquid and secure market for all participants.