The history of the Options Clearing Corporation (OCC) starts in 1973, when options began trading on an exchange (CBOE). In those times, call options were traded on only 16 different stocks. In 1975 the OCC became the official clearing corporation for exchange-listed equity options. In the same year the AMEX and the PHLX began trading equity options and joined with the OCC. The Pacific Coast Stock Exchange joined in trading equity options the following year. In 1977 put options were introduced. Index options began trading in 1983.
The growth in the trading of options has been spectacular over the years. Record volume was reached in 2001, when over 720 million equity option contracts were traded.
What does the OCC have to do with you and your options trades? When you trade an option, there is a specific person on the other side of the trade. Thus, when you buy an option, a specific person sells it to you. If you ever decide to exercise that option, it would be awkward if you had to track down that person in order to deliver an exercise notice. It would be a monumental task if you owned multiple option contracts and if there had been many sellers, instead of only one, when you made the purchase. You would then have to worry about enforcing the contract and making certain the other party fulfilled his contractual obligations.
The OCC eliminates the need to do that. By clearing all options trades, the OCC guarantees the buyer of an option can always exercise the option, without having any concerns about the person who sold that option. The OCC acts as guarantor for every option contract traded, and brings stability and integrity to the options markets. If you buy an option, they guarantee that you will be able to exercise it.
Once the option trade is cleared, all outstanding contracts become equal, and the buyer is no longer linked to a specific seller. When the owner of an option contract wants to exercise that contract, the OCC does two things. First it makes sure the exerciser owns the option and has the right to exercise it. Next, it selects, at random, one of the accounts that is currently short (you become short by selling something when you do not own it) one of those options. The OCC then assigns an exercise notice to that account. The broker is notified and passes that notification directly to the customer. The transaction is made automatically, so that if you exercise a call option, the dollar cost is removed from your account and transferred to the account of the person assigned the exercise notice. The stock is simultaneously transferred from the other person's account to yours.
From your (the call option owner) point of view, this works just like any other purchase transaction: you get the stock and pay the purchase price (the strike price of the call option). If the option is a put, then you receive the cash, and the stock is removed from your account and delivered to the other party. The whole system is automatic and very efficient.
With so much trading volume, the options markets would not be able to exist without the OCC.
