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underlying stock. This model takes a little getting used to, especially since option prices are expressed per underlying stock share rather than per contract. So if an option price is quoted as $1, you would have to spend $100 to buy one contract (not including commissions).

Clearing House, Exchanges, And Regulation

Just like any other type of standard security, options trading uses the same middleman concept of the clearing house. As discussed before, clearing houses are agencies where the monies associated with the transactions actually change hands. In other words the buyers and sellers (unwittingly) use the clearing house as the middleman to ensure that the money moves from the buyer’s account to the seller’s account and the sellers receive what they pay for. Without clearing houses to control the flow of the transaction there is no assurance that the buyers would receive their contracts and the sellers would receive the proceeds. Moreover clearing houses are where official records of all transactions are kept for future reference. This central management of records has immense benefits in terms of handling possible disputes as well as inquiries from the SEC or IRS.

With regards to options, the Options Clearing Corporation (OCC) is the sole clearing agency handling the contract transactions. But OCC also has another important task, and that is the designation of the options. Unlike stocks where the shares and the stock symbols are issued by their respective companies, options are actually designated by OCC and ultimately issued by investors themselves with market makers acting as dealers. The companies associated with the underlying stocks have nothing to do with the issuing of the options. OCC sets the options designations, investors issue and trade the contracts, market makers are the dealers, options exchanges are where the contracts are ultimately traded, and OCC is where the contracts are settled. …