Options Clearing Corporations

Firms known as clearing corporations make the rapid and orderly trading of options possible. When two traders agree on the terms of an options contract trade, their orders go to the clearing corporation, which creates the options contract, guarantees it, and eventually clears it. Clearing is the process of arranging the exchange of securities for cash once an option is exercised. In effect, the traders are buying and selling contracts not from one another, but from the clearing corporation.

Thanks to clearing corporations, there is no need to worry about exercising your option when and if you decide to. What's more, you can buy back the option you sold, thereby canceling your obligation under the contract, while the original buyer can still exercise the option he or she purchased. Clearing corporations also enforce rules about options trading and exercise.

While there are a number of clearing corporations, by far the largest is the Options Clearing Corporation (OCC), which handles nearly all exchange-traded options in the United States.

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