Options default questions

K

kxvid

Do you know of anybody know of any instance where someone got defaulted on in the options market? Has it ever happened? I know the clearing houses are supposed to prevent this, but sometimes I wonder what happens if an OTM option writer blows up sky high.

The clearing house steps in a takes the loss, right? I remember reading about a 2,000%+ return on a far OTM GOOG call option, somebody got burned big time on that trade.

Will the options clearing house sue you if you blow up into debt writing uncovered options? Makes you wonder what happened to the guy who wrote that GOOG option, as it very likely wasn't fully covered.

I guess it isn't a big problem as OTM options generally don't have much open interest. Makes you wonder if the stock market crashed what would happen to the options market. Massive string of client blowups and the clearing house going bankrupt? People not getting paid for their trades?
 
No, nobody gets defaulted precisely because of the clearing house. If there is a loss then it is covered from the fund that all clearing firms pay into. The clearing firm will then sue the particular person to recover any loss.

Besides, you are assuming that all option sellers are uncovered.
 
I remember reading about a 2,000%+ return on a far OTM GOOG call option, somebody got burned big time on that trade.



You have no way of knowing if anyone lost any money on that trade. None.

Mark
 
There's a two-level guarantee process. If a trader loses more than is in his account, the primary clearing member (brokerage firm) is responsible to the extent of its assets. In the VERY unusual case that a primary clearing member defaults, only then would the clearing house be on the hook. The whole system is very regulated and very conservatively managed, and as a result nobody has ever lost money as the result of a default by a holder of an exchange-traded contract.
 
Is there a limit to number uncovered options you can write? I know it varies per broker, but brokers never seem to say how many uncovered options you can write. All I've seen is brokers requiring 30,000 or so ( in the case of OXPS) to write uncovered options on your account. It never lists how many uncovered options you can write.
 
Another note, What happens to the call buyer when the brokerage defaults. (ie you are a TD ameritrade customer and bought 10 call contracts from a writer)

ie lets say etrade fails.

Some guy writes calls on stocks.

SIPC only covers the stock.

Contracts are liquidated according to SIPC
http://www.sipc.org/pdf/series40.pdf
 
Quote from kxvid:

The clearing house steps in a takes the loss, right? I remember reading about a 2,000%+ return on a far OTM GOOG call option, somebody got burned big time on that trade.
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That's like asking how the lotto companies make money when they just paid out $50 million to some lucky winner. You must look at the big picture and not focus on one trade, I'm sure the MM's that handle GOOG options have made a small fortune.






forex-forex
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Trading expert and guru.
 
the market is now treated like casino operation more than ever.

remember options dealing and even futures was illegal or limited.

heck even futures in forex was not widely available until the 80's


Quote from forex-forex:

That's like asking how the lotto companies make money when they just paid out $50 million to some lucky winner. You must look at the big picture and not focus on one trade, I'm sure the MM's that handle GOOG options have made a small fortune.






forex-forex
-------------
Trading expert and guru.
More...
 
Quote from KINGOFSHORTS:

Another note, What happens to the call buyer when the brokerage defaults. (ie you are a TD ameritrade customer and bought 10 call contracts from a writer)

ie lets say etrade fails.

Some guy writes calls on stocks.

SIPC only covers the stock.

Contracts are liquidated according to SIPC
http://www.sipc.org/pdf/series40.pdf
More...
I don't know but it would be bad if ETFC failed. All that 1000 new accounts a day talk, that would be a nightmare for the SIPC.
My understanding is just because something isn't covered doesn't mean the SIPC won't work to sort it out. People with futures positions have gotten their positions back after a brokerage failure even though they aren't covered.
 
Quote from KINGOFSHORTS:

Another note, What happens to the call buyer when the brokerage defaults. (ie you are a TD ameritrade customer and bought 10 call contracts from a writer)

ie lets say etrade fails.

Some guy writes calls on stocks.

SIPC only covers the stock.

Contracts are liquidated according to SIPC
http://www.sipc.org/pdf/series40.pdf
More...

The broker has nothing to do with this. It is the clearing firm of the broker that matters and that guarantees the payout.
 
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