What Is an Options Disclosure Document (ODD)?
An Options Disclosure Document (ODD), formally titled Characteristics and Risks of Standardized Options, is a comprehensive guide published by the Options Clearing Corporation (OCC) that explains how exchange-listed options work and the risks involved. It is intended to help investors—especially those new to options—understand the terminology, mechanics, and principal risks before trading options.
Key takeaways
– The ODD is issued and maintained by the OCC and is required reading for retail options customers.
– Brokers must deliver the current ODD and any supplements to customers before approving them to trade options.
– The ODD’s “Principal Risks of Options Positions” section is essential: it explains how option holders and writers can lose money and gives practical examples.
– Since 1997 the OCC issued supplements to the ODD; in 2022 it moved to publishing updated full editions instead of separate supplements.
– You can download the latest ODD from the OCC website or obtain it from your broker.
What the ODD covers
The ODD is a single booklet that summarizes the key features and risks of standardized options. Major subject areas include:
– Basic definitions and terminology (calls, puts, strike price, expiration, American vs. European exercise)
– How options are priced and what determines value (intrinsic vs. time value, effect of volatility, interest rates, dividends)
– Principal risks for buyers and sellers of options, and risks for multi-legged strategies (spreads, straddles, combinations)
– Special risks for index options, including settlement, cash-settlement mechanics, and index multipliers
– Exercise and assignment procedures (including early exercise and exercise-by-exception rules)
– Margin, margin requirements, and margin-related risks for option writers
– Clearinghouse role and how the OCC guarantees contract performance
– Practical examples illustrating profit/loss outcomes, assignment scenarios, and how positions behave over time
Why the ODD matters
– Regulatory protection: The Securities Exchange Act (Rule 9b‑1) and FINRA rules require brokers to give the ODD and keep customers informed of updates.
– Risk awareness: The ODD’s risk descriptions and examples show how investors can lose all or large portions of invested capital (for example, option buyers can lose the entire premium quickly; naked option writers may face large or unlimited losses).
– Reference: It’s the authoritative, plain‑language reference for standardized option contract terms and OCC procedures.
History and updates (brief)
– First issued by the OCC in February 1994.
– Supplements were issued beginning in December 1997 to cover new products, clarifications, and corrections.
– In March 2022 OCC moved to publishing updates as full revised editions instead of piecemeal supplements and included clarifications (for example, that some index contracts may have multipliers other than 100).
How the ODD is distributed (regulatory requirements)
– Brokers must deliver the current ODD to customers by the time the broker approves the customer to trade options. FINRA’s rule 2360 and SEC Rule 9b‑1 govern these obligations.
– For customers who previously received the ODD, brokers must also send every new supplement (or updated edition) that materially changes information.
– Delivery can be by mail or electronically if the customer has consented to electronic delivery.
Practical steps for individual investors (before and after trading options)
1. Obtain the current ODD: Download it from the OCC website or request it from your broker. Keep a local copy.
2. Read the “Principal Risks of Options Positions” section first: This section clearly summarizes the main ways traders lose money.
3. Learn or refresh basic terms: Make sure you understand calls vs. puts, long vs. short, strike, expiration, American vs. European, intrinsic/time value.
4. Study strategy-specific risks: If you plan to trade spreads, straddles, covered calls, or uncovered (naked) positions, read the ODD sections that cover those strategies.
5. Check product-specific rules: For index options or other specialized products, confirm settlement method and multiplier (not all index contracts use a 100 multiplier).
6. Ask your broker for clarifications: If any procedure—exercise, assignment, settlement timeline, margin—is unclear, get an explanation in writing.
7. Use a paper trading account or small test position: Practice the mechanics and watch how positions behave as expiration approaches.
8. Maintain documentation: Keep copies of the ODD edition you received and any supplements (or record electronic delivery consent) for compliance and reference.
9. Re-review when product rules change: If the OCC issues a new edition or your broker distributes an update, read new material before trading new option products.
Practical steps for brokers and firms (compliance checklist)
1. Deliver the ODD to every customer before approving options trading. Document delivery (paper or electronic) and record customer consent for e‑delivery where used.
2. Provide updated ODD editions/supplements to existing customers when required (per FINRA/SEC rules).
3. Ensure training and written supervisory procedures cover ODD distribution, options approval processes, and disclosure obligations.
4. Maintain records that show customers received the ODD and when they were approved to trade options.
5. Inform customers about product-specific features (index multipliers, American vs. European settlement, cash vs. physical settlement).
6. If using electronic delivery, retain proof of consent and that the customer was able to access the document.
Special considerations and common risks highlighted by the ODD
– Buyers’ risk: Option holders can lose the full premium paid, often “in a relatively short period of time.”
– Writers’ risk: Writers of uncovered calls face potentially unlimited loss; uncovered puts expose writers to large downside risk equal to the stock price less the premium.
– Assignment risk: Writers can be assigned at any time for American-style options; assignment timing can materially affect outcomes.
– Combination transaction risk: Spreads reduce some risks but introduce others (execution risk across legs, widening spreads, early assignment on one leg).
– Market disruption and liquidity: Market halts, wide bid-ask spreads, or poor liquidity can make entering or exiting positions costly.
– Index specifics: Index option contract multipliers, settlement procedures, and tax or regulatory differences can vary—review the ODD and listing exchange rules.
Examples (illustrative)
– Long call: You buy a call for $2.00 (premium). If the underlying never rises above strike before expiration, you lose the entire $2.00 premium.
– Naked short call: You sell a call without owning the underlying. If the stock rallies dramatically, losses can be very large because you may have to buy the stock at a high market price to deliver on assignment.
– Spread: Buying a call and selling a higher-strike call limits max loss (net premium paid) and caps maximum profit (difference in strikes minus net premium).
Quick checklist for reading the ODD before trading a new option product
– Did I read the “Principal Risks of Options Positions”?
– Is this an American or European option? What are exercise/assignment rules?
– What is the contract multiplier and settlement method?
– How is the option priced (what affects value)?
– What are margin rules for writers of this product?
– Are there any special tax, settlement, or exchange rules I should know?
– Has the OCC published a recent update or supplement I need to read?
Where to find the ODD and related materials
– Options Clearing Corporation (OCC) website — Characteristics and Risks of Standardized Options (ODD) and any historical versions or updates.
– Your broker’s disclosures and compliance department.
– FINRA rules page (see Rule 2360 for options-related supervisory and disclosure responsibilities).
– Investopedia and other reputable educational sites for summaries and examples (good as supplemental learning, not a substitute for the ODD).
References and further reading
– Options Clearing Corporation, Characteristics and Risks of Standardized Options (ODD) — available from the OCC website.
– Options Clearing Corporation, Historical Versions of ODD & Supplements.
– FINRA, Rule 2360 (Options).
– Securities and Exchange Commission (SEC), Rule 9b‑1 (delivery of prospectus/disclosure documents under Securities Exchange Act).
– Investopedia, “What Is an Options Disclosure Document (ODD)?” (source overview).
Final recommendation
Always read the current OCC ODD edition before trading options and keep a copy for reference. The ODD is the authoritative, regulator‑backed summary of how standardized exchange-listed option contracts work and the primary source for the risks you accept when trading options. If anything in the ODD or your broker’s disclosures is unclear, ask for clarification in writing or consult a qualified financial professional.