Options Disclosure Document (ODD) Definition

What Is an Options Disclosure Document (ODD)?

The choices disclosure document (ODD) is a publication issued by the Options Clearing Corporation (OCC) that serves as a vital guide for options traders. The excellent document—formally titled Characteristics and Risks of Standardized Options—is especially essential for novice options traders.

Options are financial derivatives based on the worth of underlying securities resembling stocks. Options give investors the precise, but not the duty, to purchase or sell an underlying asset at an agreed-upon price inside a particular timeframe.

The ODD booklet includes definitions for probably the most common options trading terms and useful examples illustrating various trading scenarios. It provides general disclosures on the risks of trading options. Each the Securities Exchange Act and the Financial Industry Regulatory Authority (FINRA) require brokers and brokerage firms to deliver the choices disclosure document and its supplements to customers.

Key Takeaways

  • The Options Clearing Corporation is chargeable for issuing the choices disclosure document and its supplements.
  • In 1994, the OCC distributed the primary options disclosure document, which provides investors with essential educational information regarding options trading.
  • The booklet covers topics essential to options investors resembling options definitions, index options, debt options, foreign currency options, and risks of options trading.
  • Investors can obtain copies of the booklet and supplements through their broker or online on the OCC’s website.

Understanding the Options Disclosure Document (ODD)

Founded in 1973, the OCC clears transactions for exchange-listed options, securities futures, and over-the-counter options. Because the world’s largest equity derivatives clearinghouse, the OCC operates under the jurisdiction of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).

In February 1994, the OCC distributed the primary edition of the choices disclosure document (ODD). Chapter headings in the newest version include:

  • 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 December 1997, the Options Clearing Corporation began issuing supplements to the ODD booklet. These supplements provided recent information, amended previously published information, and clarified concepts to accommodate the growing complexity of options products.

Probably the most recent ODD update, in March 2022, included supplemental material noting index products contracts can have a multiplier apart from 100 as established by the listing exchange, and included the newest corrections to chapter subtitles in the unique.

In March 2022, OCC said it’s going to publish future changes to the ODD as updates of the complete document slightly than supplements.

9.93 Billion

The overall variety of contracts cleared by the OCC in 2021. This includes equity and index options, in addition to futures contracts.

Requirements for Options Disclosure Document (ODD)

Since the ODD is taken into account a key publication in helping investors understand the complexities of options trading, there are rules to make sure each investor has ready access to the document.

The SEC is chargeable for approving supplements to the choices disclosure document. Brokers are required to deliver the ODD and supplements to their customers, based on Rule 9b-1 of the Securities Exchange Act. FINRA has its own rule requiring brokers to produce their customers with probably the most current ODD. This must occur by the point the broker approves the shopper to trade options.

Moreover, FINRA requires brokers to distribute each recent ODD complement to customers who’ve already received the ODD. Firms may mail the ODD and supplements to customers or transmit them electronically to those that have consented to electronic delivery.

Special Considerations

Except for the fundamental description of varied option types, perhaps crucial section of the ODD is the “Principal Risks of Options Positions.” Someone recent to the choices markets could be clever to fastidiously read this section, which fits over the primary risks of every of the choice types discussed within the document and provides some examples of how a trader might lose money. Even a seasoned trader would find the document useful for reminders. The section on the risks of owning options starts with this blunt warning: “An option holder runs the danger of losing the complete amount paid for the choice in a comparatively short time frame.”

The ODD goes on to elucidate other options trading risks, including the risks assumed by option writers, risks of combination transactions (resembling option spreads), risks occurring from the disruption within the markets of underlying assets, and the special risks of index options.

Leave a Comment

Copyright © 2024. All Rights Reserved. Finapress | Flytonic Theme by Flytonic.