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I know the Options Clearing Company guarantees the fulfillment of every option contract and it never happened that a option contract defaulted in history.

So what could you imagine must happen so a option contract defaults?

Bankruptcy of OCC?

A more than worse market crash?

How "safe" in terms of risk of default are options compared to other highly safe considered financial instruments (e.g. treasury bonds)?

  • 1
    Sort of a weird question. Options can't really 'default' as they are `a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date' - Investopedia. So that limits one side of the default. The other is most brokerages will not let you work options without the margin to cover it. Stops the other side of default. Someone might post a more technical answer but I'm out for today ;) – Ross Sep 16 '15 at 21:28
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This is an interesting question, what must happen for options to be incapable of being delivered upon.

We can look to history to see what has happened which threatened the entire options market.

In 2008, the Securities Exchange Commission banned short selling on all financial stocks and many other issues. This made it impossible for certain kinds of shares to be delivered to options holders, contributing to an increase in market volatility.

The OCC wouldn't be able to deliver even if the option writers defaulted.

But this didn't happen, as there are a lot of safeguards between the OCC and the actual trader, such as margin requirements.

The reliability of the conditions of the standardized options contracts are safe.

  • Interesting point. I know people who are currently, today, working on the Options desk at Lehman Brothers. Think that one through for a second... – Aron Nov 1 '16 at 5:18
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Think of options as insurance. If your security has had a good run up, but you are worried what it will do if the Fed raises rates then you can buy a put option to protect yourself if the price drops.

But remember, no one ever got rich by buying insurance. So my experience has been that I lose more money than I gain when I buy options.

  • How does this address the question about defaulting on an option contract? – Nate Eldredge Sep 17 '15 at 14:58

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