What is the Options Clearing Corporation (OCC)?

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In this video, we’re going to be talking about the Options Clearing Corp. which is commonly referred to as the OCC. You probably hear this a lot when you're watching other videos or when you’re reading stuff, you’ll see OCC more often than you will see the Options Clearing Corp.

But it’s important to understand their role in the options market just for educational purposes, just to know what is backing the market. The big bad OCC, everyone thinks it’s really bad, but it’s a great thing that we have here, and we’re privileged to have it as part of our market.

It's jointly owned by the Exchanges Corporation that issues all listed options and controls and affects exercises and assignments.

What they do is they provide liquidity and efficiency to the market in that the OCC guarantees all trades by acting as the other party of any purchase or sale.

This is different than what you traditionally think of when you think of buying an option. You think you’re buying it from another investor, but in reality, you’re buying it from the OCC who then sells it or buys it to the other investor on the other end.

We’ll go over a diagram here in a second just to help explain the process. But it's really important that they guarantee all of these trades, and that is what creates a fluid and efficient market.

Whenever an option writer holder sells his contracts to someone else, the OCC serves as the intermediary in the transaction, so it goes through the OCC all the time.

And the same thing when the option writer sells his contract to the OCC, and the option buyer buys it from the OCC, the OCC is acting as the intermediary.

Let’s look at an options trade example. On the right-hand side, we have an option buyer, and this is really what you want to see when you see a transaction. This is about as basic as we can get here.

You have an option buyer who wants to buy an option, so he submits his payment to the OCC, the OCC then submits that payment or that premium to the actual option writer, the writer gives the option to the OCC, the OCC clears that option and gives it back to the buyer.

It’s this figure type pattern that we have going on here, but you can see that the OCC is instrumental and being the intermediary for every single transaction and they guarantee that if you’re the option buyer that this option writer is going to make whole his obligation that he has to deliver that stock.

That's the real important point that I like to drive home with the OCC. Again, their education is great; you can check them out online, they have good information, always really good data and videos and tutorials and just general stuff.

I would invite you just to go to the education tab and read a little bit more about the OCC and exactly what they do, and their role in the market so that you understand who the big players are.

As always, I hope you guys enjoyed this video and thanks for watching. Share this video with any of your friends, colleagues or co-workers by using any of the social links you find right below this video.