Who Issues a U.S. Listed Option?

U.S. listed options are standardized financial contracts that offer the right, but not the obligation, to buy or sell an underlying asset at a specific price before a certain date. These contracts trade on regulated exchanges, providing transparency and liquidity for market participants. They are distinct from the underlying asset itself, serving as derivative instruments whose value is derived from the performance of stocks, exchange-traded funds, or other securities.

The Central Issuer

The Options Clearing Corporation (OCC) stands as the sole issuer and guarantor of all U.S. listed options. This organization acts as a central counterparty, stepping between every buyer and seller in an options transaction. By becoming the buyer to every seller and the seller to every buyer, the OCC effectively removes counterparty risk for participants in the options market.

The OCC plays a fundamental role in standardizing option contracts, ensuring that each contract for a given underlying asset has identical terms, such as contract size, typically representing 100 shares of the underlying stock. This standardization facilitates orderly trading and efficient price discovery across multiple exchanges. Furthermore, the OCC manages various risks through a robust system of margin requirements, clearing fund contributions, and daily risk management processes. These measures help ensure that the obligations of option contracts are met, even in volatile market conditions.

The Listing Process

While the Options Clearing Corporation issues and guarantees all listed options, the process of bringing these options to market involves options exchanges. These exchanges, such as the Chicago Board Options Exchange (CBOE) and NYSE Arca, propose and list new option contracts based on eligible underlying securities. They establish the specific terms under which an option will trade, including the available strike prices and expiration dates for a particular security.

Exchanges standardize the terms of newly listed options, ensuring consistency and ease of trading across different platforms. Once an option series is approved for listing by an exchange, the OCC then stands ready to issue and guarantee any contracts traded for that series. Therefore, exchanges facilitate the trading environment and define the contract specifications, while the OCC assumes the critical responsibility of contract issuance and performance guarantee.

Understanding the Underlying Asset

A common misunderstanding among those new to options trading is the belief that the company whose stock underlies an option is involved in its issuance. The underlying company has no involvement in the creation, issuance, or trading of options on its shares. For example, a technology company does not issue the call or put options traded on its stock; these are financial instruments created and managed by the broader financial market infrastructure. The company does not receive any proceeds from the trading of options, nor does it have any obligations related to them.

Options are derivative products, meaning their value is derived from the price movement of an underlying asset. Their existence and trading are a function of market demand and the regulatory framework established by entities like the Options Clearing Corporation and the various options exchanges. While the performance of a company’s stock directly influences the value of its options, the company itself remains a distinct and uninvolved entity in the options market.