I’m a bit confused as to why options need to be “cleared?” Section 9.8.2 mentions that once an option is exercised it gets randomly assigned to a writer. That would imply that there isn’t a specific writer and holder for each individual option. And if that’s the case, why isn’t there? Why is each individual option not just assigned to the writer once the holder exercises?
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Good question @Mass_coffee_louse - best answer I can give - it’s just the way the system is set up. I can offer some potential reasoning, through (although some of my thoughts below are pure speculation).
While every options transaction involves a specific holder (long side) and writer (short side), exercises result in a somewhat randomized assignment process. If I had to guess, I assume it’s because keeping track of the investors on both sides of any given trade is more difficult than it may seem on the surface. When investors place trades through brokerage firms like RobinHood, Fidelity, E*Trade, etc, those firms typically show as the party placing the trade. For example, if I place a trade to buy a call through Fidelity, Fidelity will show as the party buying the call. If you get where I’m going with this, the OCC would have to follow a potentially complex paper trail to determine who the original parties were.
Additionally, keep in mind many contracts are traded multiple times. For example, let’s assume I buy a call from you. A few weeks later, I perform a closing sale and trade the long call to another investor. A few weeks after that, you perform a closing purchase and trade the short call to another investor. The more the contract is traded, the more complex the paper trail.
Regardless, none of what I wrote above is testable. You just need to know the system and how it works on a basic level.
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Thanks for clarifying. And the reasoning you gave definitely makes a lot sense.
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