Options Disclosure Document (ODD) Definition

What Is an Choices Disclosure Doc (ODD)?

The choices disclosure doc (ODD) is a publication issued by the Choices Clearing Company (OCC) that serves as an necessary information for choices merchants. The excellent doc—formally titled Traits and Dangers of Standardized Choices—is especially important for novice choices merchants.

Choices are monetary derivatives primarily based on the worth of underlying securities akin to shares. Choices give buyers the suitable, however not the duty, to purchase or promote an underlying asset at an agreed-upon value inside a selected timeframe.

The ODD booklet contains definitions for the most typical choices buying and selling phrases and helpful examples illustrating varied buying and selling situations. It offers normal disclosures on the dangers of buying and selling choices. Each the Securities Trade Act and the Monetary Trade Regulatory Authority (FINRA) require brokers and brokerage companies to ship the choices disclosure doc and its dietary supplements to prospects.

Key Takeaways

  • The Choices Clearing Company is accountable for issuing the choices disclosure doc and its dietary supplements.
  • In 1994, the OCC distributed the primary choices disclosure doc, which offers buyers with necessary academic info relating to choices buying and selling.
  • The booklet covers subjects necessary to choices buyers akin to choices definitions, index choices, debt choices, international forex choices, and dangers of choices buying and selling.
  • Buyers can acquire copies of the booklet and dietary supplements by their dealer or on-line on the OCC’s web site.

Understanding the Choices Disclosure Doc (ODD)

Based in 1973, the OCC clears transactions for exchange-listed choices, securities futures, and over-the-counter choices. Because the world’s largest fairness derivatives clearinghouse, the OCC operates beneath the jurisdiction of the Commodity Futures Buying and selling Fee (CFTC) and the Securities and Trade Fee (SEC).

In February 1994, the OCC distributed the primary version of the choices disclosure doc (ODD). Chapter headings within the newest model embody:

  • Choices Nomenclature
  • Choices on Fairness Securities
  • Index Choices
  • Debt Choices and Credit score Default Choices
  • International Foreign money Choices
  • Flexibly-Structured Choices
  • Train and Settlement
  • Tax Issues, Transaction Prices, and Margin Necessities
  • Principal Dangers of Choices Positions

Beginning in December 1997, the Choices Clearing Company started issuing dietary supplements to the ODD booklet. These dietary supplements offered new info, amended beforehand printed info, and clarified ideas to accommodate the rising complexity of choices merchandise.

The latest ODD replace, in March 2022, included supplemental materials noting index merchandise contracts might have a multiplier apart from 100 as established by the itemizing trade, and included the newest corrections to chapter subtitles within the unique.

In March 2022, OCC stated it would publish future modifications to the ODD as updates of your entire doc moderately than dietary supplements.

9.93 Billion

The full variety of contracts cleared by the OCC in 2021. This contains fairness and index choices, in addition to futures contracts.

Necessities for Choices Disclosure Doc (ODD)

As a result of the ODD is taken into account a key publication in serving to buyers perceive the complexities of choices buying and selling, there are guidelines to make sure every investor has prepared entry to the doc.

The SEC is accountable for approving dietary supplements to the choices disclosure doc. Brokers are required to ship the ODD and dietary supplements to their prospects, based on Rule 9b-1 of the Securities Trade Act. FINRA has its personal rule requiring brokers to produce their prospects with essentially the most present ODD. This should happen by the point the dealer approves the shopper to commerce choices.

Moreover, FINRA requires brokers to distribute every new ODD complement to prospects who’ve already obtained the ODD. Corporations might mail the ODD and dietary supplements to prospects or transmit them electronically to those that have consented to digital supply.

Particular Issues

Except for the fundamental description of assorted choice varieties, maybe a very powerful part of the ODD is the “Principal Dangers of Choices Positions.” Somebody new to the choices markets could be sensible to rigorously learn this part, which works over the primary dangers of every of the choice varieties mentioned within the doc and offers some examples of how a dealer would possibly lose cash. Even a seasoned dealer would discover the doc helpful for reminders. The part on the dangers of proudly owning choices begins with this blunt warning: “An choice holder runs the danger of dropping your entire quantity paid for the choice in a comparatively quick time frame.”

The ODD goes on to elucidate different choices buying and selling dangers, together with the dangers assumed by choice writers, dangers of mixture transactions (akin to choice spreads), dangers occurring from the disruption within the markets of underlying property, and the particular dangers of index choices.

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