PRINCIPAL RISKS OF OPTIONS POSITIONS

SPECIAL RISKS OF INDEX OPTIONS

1. Writers of cash-settled index call options cannot provide in advance for their potential settlement obligations by acquiring and holding the underlying interest. A call writer can offset some of the risk of his writing position by holding a diversified portfolio of securities similar to those on which the underlying index is based. However, except where the underlying index is a specialized one based on relatively few securities, most investors cannot, as a practical matter, acquire and hold a portfolio containing exactly the same securities in the same proportions as the underlying index. Most writers of cash-settled index calls who also hold positions in securities will therefore bear the risk that the market prices of those securities will not increase as much as the index.

2. Even if the writer of a cash-settled index call option could assemble a securities portfolio that exactly reproduced the composition of the underlying index, the writer still would not be fully covered from a risk standpoint because of the "timing risk" inherent in writing cash-settled options. When a cash-settled index option is exercised, the amount of cash that the holder is entitled to receive is determined by the difference between the exercise price and the exercise settlement value, which is based on the prices of the constituent securities at a particular time on or in relation to the date on which the option is exercised. As with most other kinds of options, the writer will not learn that he has been assigned until the next business day, at the earliest. The time lag between exercise and notice of assignment poses no risk for the writer of a covered physical delivery call, because that writer's obligation is to deliver the underlying interest and not to pay its value as of a fixed time in the past. So long as the writer of a physical delivery call already owns the underlying interest, he can satisfy his settlement obligations simply by delivering it, and the risk that its value may decline after the exercise date is borne by the exercising holder. In contrast, even if the writer of a cash-settled index call holds securities that exactly match the composition of the underlying index, he will not be able to satisfy his assignment obligations by delivering those securities against payment of the exercise price. Instead, he will be required to pay cash in an amount based on the exercise settlement value on the exercise date; and by the time he learns that he has been assigned, the index may have declined, with a corresponding decline in the value of the securities portfolio. This "timing risk" is an inherent limitation on the ability of writers of cash-settled calls to cover their risk exposure by holding positions in the underlying interest. This risk applies only to American-style options. The writer of a European-style capped call that is exercisable only on the expiration date runs the risk of assignment only with respect to exercises filed on that day. If the call is more than marginally in the money on the preceding trading day, the writer can ordinarily assume that it will be exercised and take market action to protect himself against a subsequent decline in the value of his position in the underlying interest.

3. The timing risk discussed in the preceding paragraph makes spread positions and certain other multiple option strategies involving cash-settled American- style index options substantially riskier than similar strategies involving physical delivery options. With physical delivery options, a person in a spread position can ordinarily satisfy his settlement obligations on the short leg of the spread merely by exercising the long leg if it is in the money. That is, the cash or underlying interest that he obtains by exercising the long leg will ordinarily be sufficient to enable him to meet his settlement obligations on the short leg. With cash-settled index options, however, an investor in a spread position runs the risk that by the time he receives notice of an exercise assignment on the option he has written, the index value will have changed such that exercising the long leg of the spread will not yield sufficient cash to satisfy his obligation on the exercise assignment. Thus, an investor who holds a spread position in cash-settled index options and is assigned an exercise is at risk for any adverse movement in the prices of the constituent securities of the index after the time the exercise settlement value of the assigned short is determined unless the investor is able to exercise the long leg of the spread in time to receive that same exercise settlement value. Other multiple options strategies involving cash-settled options can present similar risks.

4. Readers intending to use index options to hedge against the market risk entailed in investing in individual securities should recognize the complexities of utilizing index options in this manner. Market risk is the risk that factors affecting the stock market as a whole may have a similar effect on the price of a particular equity security. Historically, some securities have tended to be highly sensitive to factors influencing the market generally; others less so. As a result, different securities may be viewed as involving different levels of market risk. In addition, a security's sensitivity to broad market influences may change over time, so that the same security may involve different levels of market risk at different times.

Investors using index options in this manner should also understand that they remain subject to company risk-that is, the risk that factors affecting a particular company, such as its market position or the quality of its management, may cause its securities to perform differently than the market as a whole.

In addition, readers intending to utilize index options to hedge a diversified securities portfolio against market risk should understand that unless the securities in the portfolio exactly mirror the securities in an underlying index, the portfolio and the index may respond differently to a given market influence. For this reason, the use of index options for hedging purposes involves special risks that are not present with "true" hedges-i.e., hedges composed of options on the specific securities in the hedged position. These risks are greatest when options on broad-based indexes are used to hedge a non-diversified securities position. Except where the composition of the position to be hedged is very similar to that of an underlying index, index options may best be understood as a means of reducing some but not all of the risks of a securities portfolio position.

Readers should also be aware that it may not be possible to purchase or liquidate a portfolio of securities at prices that exactly converge with the prices used in determining the exercise settlement values of some index options. For example, if the underlying index is comprised in whole or part of securities whose primary market is the FINRAAQ stock market, an investor cannot be certain that he will be able to effect transactions in those securities at the opening or closing prices (as the case may be) used in determining the exercise settlement value.

5. Just as holders and writers of stock options bear the risk that transactions in the underlying security may be erroneously reported, holders and writers of index options bear the risk that the reported current index level may be in error. A person who buys or sells an index option at a premium based on an erroneously reported index level is bound by the trade and has no remedy under the rules of the options markets. Similarly, persons who exercise cash-settled index options or are assigned exercises based on erroneously reported index levels will ordinarily be required to make settlement based on the exercise settlement value as initially reported by the official source of the index, even if a corrected value is subsequently announced. References herein to index values "as initially reported" refer to the values initially reported by the source of the index as definitive, and not to any tentative or preliminary values that may be announced at an earlier time subject to adjustment. In extraordinary circumstances (e.g., where an exercise settlement value as initially reported is obviously wrong and inconsistent with values previously reported, and a corrected value is promptly announced), OCC has discretion to direct that exercise settlements be based on a corrected exercise settlement value. Ordinarily, however, the exercise settlement value as initially reported by the official source of the index will be conclusive for exercise settlement purposes.

6. A holder of a cash-settled index option who exercises it before the exercise settlement value of the index for that day is available runs the risk that the level of the underlying index may subsequently change. If such a change causes the exercised option to fall out of the money, the exercising holder will be required to pay the difference between the exercise settlement value and the exercise price of the option (times the applicable multiplier) to the assigned writer.

EXAMPLE: A holder of an index put option that settles based on the closing prices of the constituent securities and that has an exercise price of 30 directs his broker to exercise at 10:00 A.M., when the level of the underlying index is 28. If the underlying index stays at that level until the close of trading that day, the holder will be entitled to receive $200 in settlement (assuming a multiplier of 100). If, however, the index level rises to 32 based on the closing prices of the constituent securities, the holder will be required to pay $200 to the assigned writer, thereby sustaining a $200 loss on the exercise. A holder who plans to exercise a cash-settled index option that settles based on closing prices can minimize this risk by withholding exercise instructions until just before the daily exercise cut-off time fixed by his brokerage firm. However, he may not be able to eliminate it entirely. Daily exercise cut-off times for index options may be earlier than those fixed for other types of options and may occur before definitive exercise settlement values have been determined. In the case of the exercise of a cash-settled index option that settles based on opening prices of the constituent securities, this risk applies if the holder submits exercise instructions before the definitive exercise settlement index value has been announced, which may be different from index levels that are initially disseminated at the time of the opening and which may not be available in some cases until several hours after the opening.

7. Cash-settled index options whose exercise settlement values are based on the opening prices of the constituent securities are not traded on the last scheduled trading day for those securities prior to the option expiration date. An option holder will be able to realize value from his option on that day only if the option is in the money and he exercises it. A writer of this type of option who has not previously closed out his position will be unable to do so on that last trading day for the constituent securities and will be at risk of being assigned an exercise.

8. Current index levels will ordinarily continue to be reported even when trading is delayed or interrupted in some or all of the constituent securities of the index or when the reporting of transactions in those securities has been delayed. In that event, the reported index levels will be based on the most recent reported prices of the constituent securities-whether or not those securities are being currently traded. As a result, reported index levels may at times be based on noncurrent price information with respect to some or even all of the constituent securities of an index. If this condition existed at the time of determining the exercise settlement value of an exercised option, that exercise would be settled on the basis of an index level that might not reflect current price information with respect to constituent securities accounting for a significant portion of the value of the index. (Indeed, as noted in Chapter IV an exercise settlement value that is based on the opening prices of the constituent securities may not coincide with, and may diverge substantially from, the index values that are reported at the time of the opening.) Moreover, if the index underlay a capped index option, that option would or would not be automatically exercised based on an index level that might not reflect the true state of the market at the time.

9. OCC has no authority, and the options markets on which capped index options are traded do not intend as of the date of this booklet, to restrict the automatic exercise of capped index options. It is therefore possible that automatic exercise of a capped index option could occur on a day when OCC or an options market has imposed restrictions on the exercise of other styles of options on the same underlying index. It is also possible that automatic exercise of a capped index option could occur on a day when the options market has suspended trading in the option. Either of these possibilities could limit the ability of a writer to take action to limit the cost of being assigned an automatic exercise.

10. The purchase and sale of index options in foreign markets at times when U.S. markets are closed may present special risks. Although an underlying index may be based on securities primarily traded in U.S. markets, the index levels reported in foreign options markets at such times may be based on the trading of some or all of the constituent securities in foreign markets, and, in any case, option premiums in the foreign market will not reflect current prices of the constituent securities in U.S. markets. In addition, if a cash-settled index option is exercised through the foreign office of a brokerage firm on a day when U.S. markets are closed, the exercise settlement value of the option will not be known until the time fixed for determining exercise settlement values on the next day on which U.S. markets are open. The corresponding risks would apply to the trading in U.S. markets of options based on indexes of securities primarily traded in foreign markets.

SPECIAL RISKS OF DEBT OPTIONS

1. Many of the special risks associated with debt options result from the character of the markets in which the underlying debt securities are issued and traded and the distinctive characteristics of debt securities. The vast majority of the trading activity in bonds and money market instruments takes place in a dealer market. Dealers typically maintain markets in all outstanding issues of Treasury securities, but most of the activity tends to center on recently issued securities. Liquidity is generally greater and quotations are generally tighter on recent issues than on older issues.

There are numerous dealers in all of the Treasury securities from which the yield on the options now traded is determined, but at the date of this booklet there is no comprehensive consolidation of bids and offers or public reporting of transaction prices in those securities such as exists in the markets for stocks. While there is some dissemination of representative bids and offers, at the date of this booklet anyone interested in buying or selling a Treasury security usually must have his brokerage firm or bank contact one or more dealers individually to learn their current quotations.

The absence of last sale information and the limited availability of quotations for debt instruments can make it difficult for many investors to obtain timely, accurate data about the state of the market for the underlying debt securities. At the same time, dealers in the underlying securities have access to private quotation networks that give actual current bids and offers of other dealers. This information is not available to most investors. As a result, these dealers may have a significant advantage over other participants in the debt options markets.

2. Another important difference between the stock market and the market for Treasury securities is that stock quotations are generally keyed to a 100-share round lot while the basic unit of trading in the debt securities market typically involves much larger dollar amounts. A round lot for most dealers in Treasury securities is, at a minimum, $1 ,000,000 of principal amount; and on Treasury bills it can be larger. Most dealers are oriented toward doing business with large institutional customers or other dealers. As a result, investors buying or selling debt securities in amounts smaller than round lots can expect to pay more and receive less than dealer quotations for round lot transactions.

The unit of trading for price-based debt options is likely to involve larger dollar amounts of the underlying debt security than is the case with stock options. In general, this means that: (a) premiums for such an option will tend to be higher than for a stock option, and (b) the increase or decrease in the price of an option that is associated with any given change in the price of the underlying security will tend to be larger for many such debt options.

If the unit of trading for a physical delivery price-based debt option is smaller than $1,000,000, investors who buy or write options covering principal amounts other than a multiple of $1,000,000 may be disadvantaged by having to deal in an odd-lot market for the underlying debt security at prices that are less favorable than for round lots.

3. In the event of a shortage of the underlying debt security deliverable on exercise of a physical delivery price-based debt option, OCC has the authority to permit other generally comparable securities to be delivered in fulfillment of the delivery obligation. If OCC exercises its authority to allow such other securities to be delivered, it may also adjust the exercise prices of the affected options by setting different prices at which otherwise non-eligible securities may be delivered. As an alternative to permitting such substitute deliveries, OCC may impose special exercise settlement procedures similar to those applicable to stock options, including the fixing of a cash settlement price payable by writers who would otherwise be unable to meet their delivery obligations (see "Settlement" in Chapter VIII ), and/or prohibit the exercise of puts by holders who would be unable to meet the resulting settlement obligations (see paragraph 5 under "Risks of Option Holders" above).

4. The hours of trading for debt options may not conform to the hours during which the debt securities are traded. To the extent that the options markets close before the markets for the underlying or other related instruments, significant price and rate movements can take place in the underlying markets that may not be reflected in the options markets. The possibility of such movements should be taken into account in relating closing prices in the options markets to those in the underlying markets. In addition, there is a risk that debt options may be exercised on the basis of price movements in the underlying security after the close of trading in the options markets when writers are no longer able to close out their short positions.

5. Because exercises of yield-based options are settled in cash, option writers cannot fully provide in advance for their potential settlement obligations by acquiring and holding the Treasury security from which the underlying yield is determined. A writer of a yield based option can theoretically offset most of the risk of his writing position by acquiring Treasury securities of the designated maturity period on which the underlying yield is based. Offsetting risk in this way may be difficult to do in practice, however. While it is possible at any given time to calculate the principal amount of Treasury securities needed to assure that the risk of the option position is offset, such calculations are based upon complex mathematical relationships. Moreover, the principal amount of Treasury securities needed to assure that the risk of an options position is fully offset will generally not remain constant throughout the life of the option, but instead will fluctuate as a result of changes in yields and remaining time to maturity. For a given percentage change in yield, this fluctuation will be greater for securities of longer maturity periods than for securities of shorter maturity periods. Furthermore, there can be no assurance that an option writer will be able to sell the Treasury securities that he holds at the option's expiration at the same average yield that is used in calculating the exercise settlement value of the option. Prices, and therefore yields, could differ from dealer to dealer. Moreover, when dealer quotations are averaged in obtaining a yield, they may result in a value which varies from the value that would be obtained by averaging yields representing actual transactions for the same securities during the same time period.

6. Investors in yield-based debt options run the risk that reported yields may be in error. The values disseminated by the designated reporting authority of the options markets during trading and for exercise settlement purposes will ordinarily be averages or medians of dealer quotations or prices, and it is possible that errors could be made in the gathering or averaging of these values. A person who buys or sells an option at a premium based on an erroneous reported yield value is bound by the trade and has no remedy under the rules of the options markets. Similarly, persons who exercise options or are assigned exercises based on erroneous reported yields will ordinarily be required to make settlement based on the value as initially reported by the reporting authority, even if a corrected value is subsequently announced. In extraordinary circumstances (e.g., where a value as initially reported is obviously wrong and inconsistent with values previously reported, and a corrected value is promptly announced), OCC may direct that exercise settlements be based on a corrected value. Ordinarily, however, the value as initially reported by the official source will be conclusive for exercise settlement purposes.

7. A holder of a yield-based option who exercises it before the exercise settlement value of the underlying yield is available runs the risk that the level of the underlying yield may subsequently change. If such a change causes the exercised option to fall out of the money, the exercising holder will be required to pay the difference between the exercise settlement value and the exercise price of the option (times the applicable multiplier) to the assigned writer. A holder who plans to exercise an option may be able to minimize this risk by withholding exercise instructions until just before the exercise cut-off time fixed by his brokerage firm. However, he may not be able to eliminate the risk entirely. Exercise cut-off times for yield-based options may occur before definitive exercise settlement values are announced. Because exercise cut-off times may vary from brokerage firm to brokerage firm, and there may be different exercise cut-off times for different yield-based options, option holders who anticipate exercising should determine the applicable cut-off times from their brokers.

8. If for any reason there are no quotations available for the Treasury security from which underlying yields of a yield-based option are determined, trading in the option may be halted. If trading is not halted, reported yields may be based on non-current price information for the Treasury security.

9. If OCC determines that the exercise settlement value of the underlying yield for any series of yield- based options is unreported or otherwise unavailable for purposes of calculating the cash-settlement amount of such series, OCC has the authority to suspend the settlement obligations of the exercising and assigned Clearing Members of options of such series or to fix the cash settlement amount for exercised options of such series based on the best information available to OCC, or to do both. Accordingly, there is a risk to both holders and writers of such options that the settlement of exercised options may be postponed and may be based on a determination by OCC rather than by the pricing actions of the market for the Treasury security from which the underlying yield is determined.

SPECIAL RISKS OF FOREIGN CURRENCY OPTIONS

1. The value of any currency, including U.S. dollars as well as foreign currencies, may be affected by complex political and economic factors applicable to the country issuing that currency. The price of a foreign currency option is dependent upon the value of the underlying foreign currency relative to the trading currency as well as the value of both currencies relative to other currencies generally. Fluctuations in the value of the trading currency-whether it is the U.S. dollar (in the case of a dollar-denominated option) or a foreign currency (in the case of a cross-rate option)-will affect exchange rates and the prices of foreign currency options, even in the case of an otherwise stable underlying foreign currency. Conversely, fluctuations in the value of an underlying foreign currency will affect exchange rates and the prices of foreign currency options even if the value of the trading currency remains relatively constant. Investors should consider factors affecting the economies and currency values of both the country of origin for the trading currency and the country of origin for the underlying currency. Although these same considerations apply to dollar-denominated options and cross-rate options, cross-rate options involve factors affecting the economies of at least two foreign countries and may involve consideration by U.S. investors of factors affecting the U.S. economy as well. Accordingly, a U.S. investor in cross-rate options may need to consider a broader range of economic developments than a U.S. investor in dollar denominated foreign currency options.

2. Even though the intrinsic value of an option is determined by the value of the underlying currency relative to the trading currency, investors who intend to convert gains or losses into U.S. dollars or other currencies may be particularly affected by changes in the exchange rates between their "home" currency and either the trading or the underlying currency.

EXAMPLE: Assume that an investor purchases a yen-denominated, at-the-money call option on British pounds by converting U.S. dollars to Japanese yen. The British pound then appreciates relative to the yen, and at expiration the exercise price is more favorable than the then current exchange rate between yen and pounds. The investor could realize a gain in yen by converting dollars to yen in order to purchase pounds at the exercise price and then reselling the pounds for yen at the current exchange rate. If the amount of that gain exceeds the premium that the investor paid for the option, the investor will realize a gain in yen on his investment in the option. However, if the yen has depreciated relative to the dollar since the investor purchased the option, the gain may be reduced or even converted to a loss when the yen are converted back to dollars. This is so because, although the yen received upon the sale of the pounds may exceed the exercise price plus the premium paid in yen, there is no guarantee that, when the yen are converted back to dollars at the current rate, the dollars received will exceed the exercise price plus the premium paid in dollars. If the investor converts the pounds directly into dollars rather than to yen and then to dollars, the result would be the same since the amount of the dollars received would be expected to be approximately the same, ignoring any difference in transaction costs and any timing differences in the two-step process.

Similar considerations will apply if the investor liquidates his investment in a cross-rate option by selling it rather than by exercising it.

EXAMPLE: Assume in the previous example that the premium value of the call option has increased permitting the investor to liquidate his investment in the option by selling it for more yen than he paid for it. If the exchange rate between the U.S. dollar and the Japanese yen has not changed, the investor should be able to convert the yen received on the sale of the option to a U.S. dollar amount greater than his original investment. If, on the other hand, the yen has declined in value relative to the U.S. dollar, the investor's gain in yen may be reduced or converted to a loss when the premium received on the sale of the option is converted to dollars.

3. The exchange rates of foreign currencies (and therefore the prices of foreign currency options) could be significantly affected, fixed or supported directly or indirectly by government actions. Government actions could increase risks to investors in both dollar-denominated and cross-rate options if exchange rates were not free to fluctuate in response to other market forces. Investors in options involving currencies of countries that participate in the European Monetary System ("EMS") should note that, as of the date of this booklet, exchange rates among EMS currencies are subject to exchange rate agreements and intervention mechanisms of the EMS. The monetary authorities of other countries may also intervene, either independently or in concert with others, to attempt to affect the exchange rates between their currencies and other currencies.

4. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those likely to be involved in the exercise of individual foreign currency option contracts, investors who buy or write foreign currency options may be disadvantaged by having to deal in an odd lot market for the underlying foreign currencies at prices that are less favorable than for round lots. Because this price differential may be considerable, it should be taken into account when assessing the profitability of a foreign currency option transaction that will involve the exchange of one currency for another.

5. There is no systematic reporting of last sale information for foreign currencies. There is reasonably current, representative bid and offer information available on any market where foreign currency options are traded, in certain brokers' offices, in bank foreign currency trading offices, and to others who wish to subscribe for this information. There is, however, no regulatory requirement that those quotations be firm or be revised on a timely basis. The absence of last sale information and the limited availability of quotations to individual investors may make it difficult for many investors to obtain timely, accurate data about the state of the underlying market. In addition, the quotation information that is available is representative of very large round lot transactions in the interbank market and does not reflect exchange rates for smaller odd lot transactions. Since the relatively small amount of currency underlying a single foreign currency option would be treated as an odd lot in the interbank market, available pricing information from that market may not necessarily reflect prices pertinent to a single foreign currency option contract.

The quotation information available to investors may be from sources that are different from those used to calculate the exercise settlement value of cash-settled foreign currency options. An investor who attempts to realize the intrinsic value of such an option through an exercise rather than by selling the option in a closing transaction runs the risk that the exercise settlement value may be less than appears from the information then available to him.

6. Foreign governmental restrictions or taxes could result in adverse changes in the cost of acquiring or disposing of foreign currencies. If OCC determines that such restrictions or taxes would prevent the orderly settlement of delivery foreign currency option exercises or would impose undue burdens on parties to exercise settlements, it has authority to impose special exercise settlement procedures, which could adversely affect some investors.

7. The interbank market in foreign currencies is a global, around-the-clock market. Therefore, the hours of trading for foreign currency options do not conform to the hours during which the underlying currencies are traded. To the extent that the options markets are closed while the market for the underlying currencies remains open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets. The possibility of such movements should be taken into account in relating closing prices in the options markets to those in the underlying markets. In addition, this creates a risk that foreign currency options may be exercised on the basis of price movements in the underlying currency after the close of trading in the options markets, when writers are no longer able to close out their short positions.

8. Since exercise settlement of physical delivery foreign currency options-whether they are dollar-denominated or cross-rate options-occurs within the country issuing the underlying foreign currency, investors must accept or make delivery of the trading and underlying foreign currencies through their brokerage firms in conformity with any U.S. or foreign restrictions or regulations regarding the maintenance of foreign banking arrangements by U.S. residents, and may be required to pay any fees, taxes or charges associated with such deliveries.

9. Exercise settlement of physical delivery foreign currency options whether they are dollar-denominated or cross-rate options is made through OCC's correspondent banks in the country of origin. Investors may be exposed to losses in the event that a correspondent bank should fail during the settlement process.

10. As in the case of other cash-settled options, writers of cash-settled foreign currency call options cannot fully provide in advance for their potential settlement obligations by acquiring and holding the underlying interest. Although a call writer may hold the quantity of the currency underlying the option, there is no assurance that if he is assigned an exercise he will be able to sell such currency at the exercise settlement value.

11. If a cash-settled foreign currency option is exercised based upon a reported exercise settlement value that is in error, the holder and the writer will ordinarily be obligated to make settlement based on the exercise settlement value as originally reported, even if the value is subsequently revised or determined to have been inaccurate. In extraordinary circumstances (e.g., where the value as initially reported is obviously wrong and inconsistent with other available price information and a corrected value is promptly announced), OCC has discretion to direct that the exercise settlement be based on the corrected value.

12. If cash-settled foreign currency options expire on a trading day-as is the case with the cash-settled options traded at the date of this booklet-there will ordinarily be an abbreviated trading session in those options on the morning of their expiration date. If the opening of the options market should be delayed for any reason on that day, there may be no trading at all that day in those options. Accordingly, holders and writers who wait until the last trading day to close out their positions in closing transactions in those options run a risk that they may be unable to do so.

13. If OCC determines that the exercise settlement value for any cash-settled foreign currency option is unavailable for purposes of calculating the cash settlement amount, OCC has the authority to suspend the settlement obligations of the exercising holder and assigned writer of such option or to fix the cash settlement amount based on the best information available to OCC, or to do both. Accordingly, there is a risk to both holders and writers that the settlement of exercised cash-settled foreign currency options may be postponed and may be based on a determination by OCC rather than by the procedures specified by the options market on which the options are traded.

SPECIAL RISKS OF FLEXIBLY STRUCTURED OPTIONS

In addition to the risks discussed above, the following special risks are applicable to flexibly structured options.

1. Because flexibly structured options have variable terms that are fixed by the parties, there are no pre-established series of flexibly structured options. Rather, many different series of flexibly structured options may be created and outstanding at any given time as a result of the various designations of variable terms that are made in different transactions. Secondary trading interest in flexibly structured options may therefore be spread over a larger number of series than the trading interest in other options, the trading interest in any particular series of flexibly structured options may be very limited, the secondary markets in flexibly structured options may be less deep, liquid and continuous than the markets in other options on the same underlying interests, and the premiums for flexibly structured options may not correlate with premiums for such other options.

2. OCC may base its calculations of the margin requirements of OCC's Clearing Members for positions in a series of flexibly structured options on an estimate derived from data and factors OCC deems pertinent in respect of quotations and transactions in that options series and in other options series. Alternatively, OCC may fix such margin requirements at a level it deems necessary to protect the respective interests of OCC, the Clearing Members and the public. As a result, the Clearing Member's margin requirements for positions in flexibly structured options may differ from-and may be significantly greater than-the margin requirements applicable to similar positions in other options on the same underlying interest. Such differences may cause Clearing Members to require customers that maintain positions in flexibly structured options to deposit more margin for flexibly structured options positions than for positions in other options. To the extent OCC's estimate of the current value of a flexibly structured option is used in the determinations of the margin requirements of the Board of Governors of the Federal Reserve System, the options markets and other self-regulatory organizations, it may also cause such margin requirements to be greater than they would be for other options.

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