SIE Ready🎯 Options · Lesson 5 of 6 · 5 min
Exercise, Expiration and the OCC
🏛️ When you buy a listed option, you never have to wonder whether the seller will pay. A single clearinghouse stands in the middle of every trade.
💡 Key idea
OCC is the issuer and guarantor of listed options. American = exercise anytime; European = only at expiration. Index options settle in cash.
🧠 Why it matters
The OPTIONS CLEARING CORPORATION (OCC) issues, clears and settles listed options. It becomes the buyer to every seller and the seller to every buyer, guaranteeing performance. When a holder exercises, OCC assigns the exercise randomly to a clearing member firm, which then assigns one of its customers. AMERICAN-style options can be exercised any business day up to expiration (standard equity options); EUROPEAN-style only at expiration (many index options, such as SPX). Stock options settle by delivering shares; exercise settles T+1, and premiums also settle the next business day. INDEX options settle in CASH: the writer pays the in-the-money amount × 100. At expiration, OCC automatically exercises options at least $0.01 in the money unless told otherwise.
📈 In the real world
🎲 Priya, a fictional investor, wrote 1 call that is now deep in the money. She wonders who chose her for assignment. The holder's exercise went to OCC, which randomly assigned it to a clearing firm; that firm then picked an account under its own fair method. Her shares are delivered one business day later.
📌 Takeaways
- OCC issues and guarantees listed options; buyer and seller never rely on each other
- American: exercise any time to expiration. European: only at expiration
- Index options settle in cash; stock option exercises settle T+1
📖 Terms in this lesson
American-style option: An option that may be exercised any time up to expiration; a European-style option may be exercised only at expiration.
Options Clearing Corporation (OCC): The clearing organization that issues and guarantees listed options, standing between every buyer and writer.
✅ Test yourself
Which entity issues and guarantees listed options?
- FINRA
- The exchange
- The SEC
- The OCC
Answer: D · The OCC
The Options Clearing Corporation issues, clears and settles standardized options and stands between buyers and sellers. The SEC and FINRA regulate; exchanges provide the marketplace.
An option that can be exercised only at expiration is called:
- Cash style
- Index style
- American style
- European style
Answer: D · European style
European-style options can be exercised only at expiration. American-style options, the norm for equity options, can be exercised at any time up to expiration.
How is the exercise of a broad-based index option settled?
- Delivery of a futures contract
- A cash payment of the ITM amount
- Delivery of every stock in the index
- Delivery of 100 index fund shares
Answer: B · A cash payment of the ITM amount
Index options are cash-settled: the writer pays the holder the in-the-money amount times the multiplier. No stocks, fund shares or futures are delivered.
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