The Options Disclosure Document (ODD) is a vital publication released by the Options Clearing Corporation (OCC) that serves as an indispensable guide for options traders. This comprehensive document, formally titled Characteristics and Risks of Standardized Options, is especially crucial for novice traders looking to navigate the complexities of the options market.
Options are financial derivatives based on the value of underlying securities like stocks. They grant investors the right, but not the obligation, to buy or sell an asset at a predetermined price within a specific timeframe.
The ODD contains definitions for the most commonly used options trading terms and provides useful examples showcasing various trading scenarios. Most importantly, it offers comprehensive disclosures on the risks involved in trading options. Brokers and brokerage firms are mandated by law to deliver the ODD and its supplements to their customers.
Key Takeaways
- The Options Clearing Corporation is responsible for issuing the ODD and its supplements.
- The first ODD was published in 1994 to educate investors on options trading.
- The ODD covers essential topics such as options definitions, index options, debt options, foreign currency options, and trading risks.
- The booklet and its supplements are available through brokers or online on the OCC’s website.
Understanding the Options Disclosure Document (ODD)
Founded in 1973, the OCC is the world’s largest equity derivatives clearinghouse, clearing transactions for exchange-listed options, securities futures, and over-the-counter options under the jurisdiction of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
In February 1994, the OCC released the first edition of the ODD. The latest version includes chapter headings on multiple topics, such as:
- Options Nomenclature
- Options on Equity Securities
- Index Options
- Debt Options and Credit Default Options
- Foreign Currency Options
- Flexibly Structured Options
- Exercise and Settlement
- Tax Considerations, Transaction Costs, and Margin Requirements
- Principal Risks of Options Positions
Starting in 1997, the OCC began issuing supplements to the ODD booklet to provide new information and adjust previous explanations due to the evolving nature of options products. The latest update in March 2022 introduced new supplemental material and announced that future updates would be for the entire document rather than individual supplements.
[9.93 Billion]
The total number of contracts cleared by the OCC in 2021, encompassing equity, index options, and futures contracts.
Requirements for the Options Disclosure Document (ODD)
Because the ODD is vital for helping investors comprehend options trading complexities, regulations ensure investors have ready access to it. The SEC approves ODD supplements, and brokers are required to deliver the ODD and its supplements to customers in compliance with Rule 9b-1 of the Securities Exchange Act.
FINRA also mandates brokers to supply the most current ODD by the time customers are approved for options trading. Brokers must also distribute each new ODD supplement to those who have previously received the ODD. Firms can mail the ODD and supplements or transmit them electronically to customers who have opted for electronic delivery.
The latest version of the ODD is available for download as a PDF on the OCC’s website.
Special Considerations
One of the most important sections of the ODD is
Related Terms: Options Clearing Corporation, financial derivatives, SEC, FINRA.
References
- Options Clearing Corporation. “Characteristics and Risks of Standardized Options”.
- Options Clearing Corporation. “Historical Versions of ODD & Supplements”.
- Options Clearing Corporation. “Characteristics and Risks of Standardized Options”.
- Options Clearing Corporation. “What Is OCC?”
- Options Clearing Corporation. “Characteristics and Risks of Standardized Options”, Page 92.
- Options Clearing Corporation. “Characteristics and Risks of Standardized Options”.
- Options Clearing Corporation. “2021 Year In Review”.
- FINRA. “2360. Options”, See 2360(b)(11)(A)(i).
- Options Clearing Corporation. “Characteristics and Risks of Standardized Options”, Page 60.
