INTRODUCTION

This document relates solely to options issued by The Options Clearing Corporation ("OCC"), and all references to "options" in this booklet are applicable only to such options. As of the date of this booklet, options are traded on the United States markets listed and on the European Options Exchange in Amsterdam, The Netherlands. In the future, options may be traded on other markets within or outside the United States. The markets on which options are traded at any given time are referred to in this booklet as the "options markets."

OCC is a registered clearing agency, and each U.S. options market is a national securities exchange, that is subject to regulation by the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934. Foreign options markets, and their members, are not generally subject to regulation by the SEC or to the requirements of the securities or other laws of the U.S. and may not be subject to the jurisdiction of U.S. courts.

What is an option? An option is the right either to buy or to sell a specified amount or value of a particular underlying interest at a fixed exercise price by exercising the option before its specified expiration date. An option which gives a right to buy is a call option, and an option which gives a right to sell is a put option. Calls and puts are distinct types of options, and the buying or selling of one type does not involve the option.

EXAMPLE: An option to buy 100 shares of common stock of the XYZ Corporation at a specified exercise price would be an XYZ call option. An option to sell 100 shares of common stock of the XYZ Corporation at a specified exercise price would be an XYZ put option.

There are two different kinds of options, physical delivery options and cash-settled options. A physical delivery option gives its owner the right to receive physical delivery (if it is a call), or to make physical delivery (if it is a put), of the underlying interest when the option is exercised. A cash-settled option gives its owner the right to receive a cash payment based on the difference between a determined value of the underlying interest at the time the option is exercised and the fixed exercise price of the option. A cash-settled call conveys the right to receive a cash payment if the determined value of the underlying interest at exercise-this value is known as the exercise settlement value-exceeds the exercise price of the option, and a cash-settled put conveys the right to receive a cash payment if the exercise settlement value is less than the exercise price of the option.

Each options market selects the underlying interests on which options are traded on that market. Options are currently available covering four types of underlying interests: equity securities, stock indexes, government debt securities, and foreign currencies. Options on other types of underlying interests may become available in the future.

Most options have standardized terms-such as the nature and amount of the underlying interest, the expiration date, the exercise price, whether the option is a call or a put, whether the option is a physical delivery option or a cash-settled option, the manner in which the cash payment and the exercise settlement value of a cash-settled option are determined, the multiplier of a cash-settled option, the style of the option, whether the option has automatic exercise provisions, and adjustment provisions. These standardized terms are generally described in Chapter II. Each U.S. options market publishes specification sheets setting forth the particular standardized terms of the options traded on that options market. (The options markets may also provide for trading in options whose terms are not all fixed in advance. Rather, subject to certain limitations, the parties to transactions in these options may designate certain of the terms. These flexibly structured options are discussed in Chapter VII of this booklet.)

Options having the same standardized terms are identical and comprise an options series. The standardization of terms makes it more likely that there will be a secondary market in which holders and writers of options can close out their positions by offsetting sales and purchases. By selling an option of the same series as the one he bought, or buying an option of the same series as the one he wrote, an investor can close out his position in that option at any time there is a functioning secondary options market in options of that series.

In some instances, options of the same series may be traded on more than one options market at the same time. Options that are so traded are called multiply-traded options. Options traded on a U.S. options market may also be traded on a foreign options market. These options are referred to as internationally-traded options. Multiply-traded and internationally-traded options can ordinarily be purchased and written, and positions in these options can ordinarily be liquidated in offsetting closing transactions, in any of the options markets in which the options are traded. However, because premiums are affected by market forces, the premiums for identical multiply-traded or internationally-traded options may not be the same in all markets at any given time.

If an options market learns that a particular underlying interest no longer meets its requirements for options trading or is not eligible for trading in all U.S. jurisdictions, or if an options market decides to discontinue trading in a particular options series for another reason, the options market may stop introducing new options on that underlying interest and may in certain circumstances impose restrictions on transactions that open new positions in options series that have been previously introduced, although trading in the options series will ordinarily continue on at least one options market until its expiration.

Options generally are traded on U.S. options markets during normal day-time business hours of U.S. securities exchanges and for a short period afterward. However, trading in options may not be confined to those hours. Trading in evening and night trading sessions occurs in options on foreign currencies and may in the future occur in other types of options. Moreover, when there are unusual market conditions, an options market may authorize trading to continue for a substantially longer period than under normal conditions. Trading in an expiring option may close at an earlier time than trading in other options. Trading hours for options are also subject to change from time to time. Readers should ascertain the trading hours of the particular options they are interested in trading from the options markets where those options are traded. Readers should also be aware that trading in underlying interests is not confined to normal exchange trading hours. For example, underlying foreign currencies and debt securities are traded in international markets on virtually an around-the-clock basis, and underlying equity securities may be traded in foreign markets when U.S. markets are closed and in some U.S. markets after the close of their normal trading hours.

Readers should be aware that this booklet has been written to meet the requirements of an SEC rule that requires the U.S. options markets to prepare, and brokerage firms to distribute, a booklet that briefly and generally describes the characteristics of options and the risks to investors of maintaining positions in options. Options are versatile instruments that can be used in a wide variety of investment strategies. They give the investor the ability to create positions that reflect the investor's opinion of an underlying interest and to select investment strategies that reflect the investor's tolerance for risk. This booklet is not designed to describe the various potential benefits of options or how investors may use options to enhance their investment strategies or to reduce risk. Numerous other publications, including some prepared by the U.S. options markets that are available upon request, contain discussions of the uses and potential benefits of options and of the various trading and investment strategies that can be employed with options. Readers who wish to balance the general discussion of risks that is contained in this booklet with a discussion of options uses, benefits and strategies should consult one or more of these other publications.

Readers should read and understand this booklet in its entirety, since a number of the separate chapters will be relevant to every reader interested in buying or writing options. For example, a reader who is interested in options on equity securities should fully read not only Chapter III, but also should read Chapters II, VIII and IX, as well as the discussion of risks in Chapter X. Readers should also be aware that, although this booklet seeks to describe the various characteristics of options and the risks that are unique to being an investor in options, there are many matters which are beyond the scope of this booklet that are not discussed. Chapter Xl contains a discussion of the scope and limitations of this booklet.

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