February 19941997 through 2012Supplements included

CHARACTERISTICSAND

RISKSOF

STANDARDIZEDOPTIONS

BATS Exchange, Inc.8050 Marshall Drive

Lexena, Kansas 66214

C2 OPTIONS EXCHANGE, INCORPORATED400 South LaSalle StreetChicago, Illinois 60605

CHICAGO BOARD OPTIONS EXCHANGE,INCORPORATED

400 South LaSalle StreetChicago, Illinois 60605

INTERNATIONAL SECURITIESEXCHANGE, LLC60 Broad Street

New York, New York 10004

NASDAQ OMX BX, INC.101 Arch Street

Boston, Massachusetts 02110

NASDAQ OMX PHLX, INC.1900 Market Street

Philadelphia, Pennsylvania 19103

NASDAQ STOCK MARKET, LLCOne Liberty Plaza

165 BroadwayNew York, New York 10006

NYSE AMEX LLC11 Wall Street

New York, New York 10005

NYSE ARCA, INC.100 South Wacker DriveChicago, Illinois 60606

� 1994 American Stock Exchange, LLC, Chicago BoardOptions Exchange, Incorporated, New York Stock Exchange,Inc., NYSE Arca, Inc. and Philadelphia Stock Exchange, Inc.

CHARACTERISTICS ANDRISKS OF

STANDARDIZED OPTIONSTABLE OF CONTENTS Page

CHAPTER I—INTRODUCTION . . . . . . . . . . . . . . 1CHAPTER II—OPTIONS NOMENCLATURE . . . . . . 5CHAPTER III—OPTIONS ON EQUITY SECURITIES 18

Features of Stock Options . . . . . . . . . . . . . . . . . 18CHAPTER IV—INDEX OPTIONS . . . . . . . . . . . . . 23

About Indexes . . . . . . . . . . . . . . . . . . . . . . . . 23Features of Index Options . . . . . . . . . . . . . . . . . 26

CHAPTER V—DEBT OPTIONS . . . . . . . . . . . . . . 29Rates, Yields and Prices of Debt Securities . . . . . . . 29Treasury Securities . . . . . . . . . . . . . . . . . . . . . . 31Yield-Based Options . . . . . . . . . . . . . . . . . . . . . 32

CHAPTER VI—FOREIGN CURRENCY OPTIONS . . 35Market for Foreign Currencies . . . . . . . . . . . . . . . 36Special Characteristics of Foreign Currency Options . 37Special Features of Dollar-Denominated Foreign

Currency Options . . . . . . . . . . . . . . . . . . . . . 38Cross-Rate Foreign Currency Options . . . . . . . . . . 41Special Features of Cross-Rate Options . . . . . . . . . 42Cash-Settled Foreign Currency Options . . . . . . . . . 43

CHAPTER VII—FLEXIBLY STRUCTURED OPTIONS 45Special Features of Flexibly Structured Options . . . . 46

CHAPTER VIII—EXERCISE AND SETTLEMENT . . . 49How to Exercise . . . . . . . . . . . . . . . . . . . . . . . 49Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . 51Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

CHAPTER IX—TAX CONSIDERATIONS,TRANSACTION COSTS AND MARGINREQUIREMENTS . . . . . . . . . . . . . . . . . . . . . 54Tax Considerations . . . . . . . . . . . . . . . . . . . . . . 54Transaction Costs . . . . . . . . . . . . . . . . . . . . . . 55Margin Requirements . . . . . . . . . . . . . . . . . . . . 55

CHAPTER X—PRINCIPAL RISKS OF OPTIONSPOSITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 57Risks of Option Holders . . . . . . . . . . . . . . . . . . 58Risks of Option Writers . . . . . . . . . . . . . . . . . . . 62Other Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 67Special Risks of Index Options . . . . . . . . . . . . . . 73Special Risks of Debt Options . . . . . . . . . . . . . . . 78Special Risks of Foreign Currency Options . . . . . . . 83Special Risks of Flexibly Structured Options . . . . . . 87

CHAPTER XI—SCOPE AND LIMITATIONS OFTHIS BOOKLET . . . . . . . . . . . . . . . . . . . . . . 89

SUPPLEMENTSDecember 1997 . . . . . . . . . . . . . . . . . . . . . . . 95March 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 96January 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 98April 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 100May 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 105June 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 114June 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 122December 2009 . . . . . . . . . . . . . . . . . . . . . . . 148May 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . 161January 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 167March 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . 175January 2012 . . . . . . . . . . . . . . . . . . . . . . . . . 183

APRIL 2007SUPPLEMENT

The February 1994 edition of the booklet entitledCharacteristics and Risks of Standardized Options (the‘‘booklet’’) is amended as provided below. The changespertain to non-rate modified cash-settled foreign cur-rency options and rate-modified cash-settled foreign cur-rency options. This supplement supersedes andreplaces the January 2007 supplement.

On page 38, the second paragraph under the head-ing ‘‘Special Features of Dollar-Denominated Foreign Cur-rency Options’’ is deleted and replaced with the following:

NON-RATE-MODIFIED CASH-SETTLEDFOREIGN CURRENCY OPTIONS

Exercise prices for currently available dollar-denom-inated options on foreign currencies (other thanrate-modified currency options, as described below) arestated in units of U.S. currency (e.g., cents or hundredthsof a cent) per unit of foreign currency. In order to deter-mine the total exercise price per contract, it is necessaryto know the unit of U.S. currency used for options on theparticular foreign currency, and to multiply the statedexercise price by the unit of trading for such options. Forexample, at the date of this booklet, dollar-denominatedBritish pound options are expressed in U.S. cents perunit, and dollar-denominated Japanese yen options areexpressed in hundredths of U.S. cents per unit.

On page 38, the following is inserted immediatelyfollowing the second ‘‘EXAMPLE’’ at the end of the page:

Readers should note, however, that certainexchanges may express exercise prices in other uncon-ventional ways. For example, an exercise price stated as$100.50 may in reality mean $1.0050. Readers need tobe sure they fully understand the various conventionsused by the exchanges on which they trade in quotingexercise prices.

On page 39, the second paragraph is deleted andreplaced with the following:

Premiums for currently available dollar-denominatedoptions on foreign currencies (other than rate-modified cur-rency options, as described below) are expressed in unitsof U.S. currency per unit of foreign currency. In order tocalculate the cost of the option, it is necessary to know theunit of U.S. currency used for options on the particular

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foreign currency. For example, at the date of this booklet,premiums for currently available dollar-denominated Swissfranc options are expressed in U.S. cents, and premiumsfor currently available dollar-denominated Japanese yenoptions are expressed in hundredths of U.S. cents.

On page 39, the following are deleted: (a) the sen-tence immediately following the first ‘‘EXAMPLE,’’ (b) thesecond ‘‘EXAMPLE,’’ and (c) the sentence immediatelyfollowing the second ‘‘EXAMPLE.’’

On page 39, the following is inserted immediatelybefore the last paragraph:

Readers should note, however, that certainexchanges may express premiums in other unconven-tional ways. Readers need to be sure they fully under-stand the various conventions used by the exchanges onwhich they trade in quoting premiums.

The first paragraph under the heading ‘‘Cash-SettledForeign Currency Options,’’ which is the last paragraphon page 43, is deleted and the following sentence isadded at the beginning of the first paragraph on page 44:

At the date of this booklet, dollar-denominatedcash-settled foreign currency options have also beenapproved for trading.

The last four paragraphs on page 44 are deleted andreplaced with the following:

EXAMPLE: If the exercise price of a cash-settled,dollar-denominated call option on euros is $1.2500 pereuro, the exercise settlement value of the euro is deter-mined to be $1.2607 and the option covers 10,000 euros,then the cash settlement amount for the option will be($1.2607 � $1.2500) � 10,000 = $107.00.

Cash-settled foreign currency options may be auto-matically exercised on the expiration date if in the moneyor if in the money by a certain amount. See the discus-sion in Chapter VIII under ‘‘How to Exercise.’’

The exercise settlement value for cash-settled foreigncurrency options will be based on an exchange rate forthe underlying foreign currency from a source selectedby the market on which the options trade as set forth inexchange rules. In the case of rate-modified foreign cur-rency options, the options market on which the optionsare traded would calculate and disseminate the underly-ing rate. In either case this rate may be based on a rateannounced by the Federal Reserve Bank of New York, bidand offer quotations from a sampling of participants in theinterbank spot market for the underlying foreign currency,the rate reported by a recognized pricing service, or some

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other widely-available rate. The time as of which the exer-cise settlement value is calculated and the method ofcalculation are determined by the options market onwhich the options are traded and may be changed by it atany time. Any such change may be made applicable tooptions outstanding at the time of the change.

If OCC determines that the exercise settlementvalue of the underlying foreign currency for any series ofcash-settled foreign currency options is unreported,inaccurate, unreliable, unavailable, or inappropriate forpurposes of calculating the cash settlement amount ofsuch series, OCC has the authority to suspend the settle-ment obligations of the exercising and assigned ClearingMembers of options of such series or to fix the cashsettlement amount for exercised options of such series orto do both. In the event of such a suspension, OCC will fixa new settlement date after OCC determines that theexercise settlement value is available or after OCC fixesthe cash settlement amount.

If OCC determines to fix the cash settlementamount, it will act through an adjustment panel that willuse its judgment as to what is appropriate for the protec-tion of investors and the public interest. For a descriptionof adjustment panels, see ‘‘Adjustment and AdjustmentPanels’’ in Chapter II. The panel may fix the cash settle-ment amount using the reported price or value of theunderlying foreign currency at such time, or representinga combination or average of prices or values at such timeor times, and reported in such manner, as the paneldeems appropriate.

If an adjustment panel delays fixing a cash settle-ment amount for a series of cash-settled foreign currencyoptions past the last trading day before expiration of thatseries, normal expiration exercise procedures will notapply to the affected series. Instead, exercise settlementwill be postponed until the next business day followingthe day when the adjustment panel fixes the cash settle-ment amount, and each long position in the affectedseries will be treated as having been exercised if the cashsettlement amount per contract for that series is $1.00 ormore. If the cash settlement amount per contract is lessthan $1.00, the option will be treated as having expiredunexercised. As a result of these procedures, holders ofexpiring cash-settled foreign currency options may notknow whether their options have been exercised, andwriters of such options may not know whether they havebeen assigned an exercise, until after the expiration date.An adjustment panel’s determinations shall be conclu-sive, binding on all investors, and not subject to review.

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RATE-MODIFIED CASH-SETTLEDFOREIGN CURRENCY OPTIONS

A rate-modified currency option is a type of foreigncurrency option that may be thought of as an option onan underlying exchange rate between two currencies.The holder of a rate-modified currency option receives inU.S. dollars the difference between the modified rate andthe exercise price multiplied by a multiplier (e.g.,USD $100). In this respect, rate-modified currencyoptions resemble cash-settled index options where theindex is an exchange rate between two currencies.Exchange rates in the spot market are expressed as thenumber of units of one currency (‘‘currency 1’’) requiredto purchase a single unit of a second currency (‘‘cur-rency 2’’), and for each pairing of the world’s major cur-rencies, there is a convention as to which currency iscurrency 1 and which is currency 2. You should be awarethat the exchange rates underlying rate-modified cur-rency options may or may not be stated in the same waythat they are conventionally quoted in the spot market.For example, exchange rates between the U.S. dollar andthe euro are generally quoted as the number of dollarsrequired to purchase a single euro; but the rate underly-ing a rate-modified currency option could be stated asthe number of euros required to purchase a single dollar.You should therefore be certain that you understand themeaning of an underlying exchange rate.

In the case of rate-modified currency options, theunderlying exchange rate may be multiplied by a‘‘rate-modifier,’’ such as 1, 10 or 100, to create an under-lying value that more closely resembles a conventionalindex value. Exercise prices would, of course, also beexpressed in terms of the rate-modified values.

EXAMPLE: A rate-modifier of 100 may be applied tothe exchange rate between U.S. dollars (‘‘USD’’) andSwiss francs (‘‘CHF’’) in order to obtain the underlyingexchange rate for USD/CHF rate-modified currencyoptions. If the current exchange rate in the USD/CHFspot market is 1.24 Swiss francs per dollar, the currentrate-modified exchange rate would be stated as(1.24 � 100) = 124. For example, an exercise price of1.25 Swiss francs per dollar would be expressed as 125.

As in the case of an index option, the premiums andexercise settlement values of rate-modified currencyoptions are determined using a multiplier, e.g., USD $100.

EXAMPLE: A rate-modified USD/CHF call option hasan exercise price of 125. The USD/CHF exchange rate inthe spot market at the time the exercise settlement value isfixed is 1.27 Swiss francs per dollar, meaning that the

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underlying rate-modfied value is (1.27 � 100) = 127. Theoption is in the money. The exercise settlement value ofthe option is (127 � 125) � $100 = $200.

Do not confuse the rate-modifier with the multiplier.They serve different purposes and may or may not havethe same numeric value.

EXAMPLE: Assume that the exchange rate underly-ing a rate-modified call option on the exchange ratebetween the U.S. dollar and the Mexican peso is statedas Mexican pesos per U.S. dollar (USD/MXN). Therate-modifier could be 10 and the multiplier could be$100. If the exercise price of the option is 11 Mexicanpesos per U.S. dollar, it is stated as 11 � 10 = 110. If theunderlying exchange rate is 11.2 at the time the option isexercised, the exercise settlement value is (112 �110) � $100 = $200.

Note that, as in the case of index options, the multi-plier determines the cash value of an option that is in themoney by a specified amount. Like index options, andunlike other cash-settled currency options, arate-modified currency option has no unit of trading—itdoes not relate to a specified quantity of an underlyingcurrency.

The multiplier is also used in determining the totalpremium for a rate-modified currency option. For exam-ple, if a premium is quoted as .50 and the multiplier is$100, the total premium for a single option is $50.

The paragraph numbered 12 on page 87 is deleted.

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MAY 2007SUPPLEMENT

The February 1994 edition of the booklet entitledCharacteristics and Risks of Standardized Options (the‘‘Booklet’’) is amended as follows to reflect certainchanges in OCC’s rules as well as the rules of certainoptions markets.

The changes in Part I reflect modifications made tothe definition of ‘‘ordinary cash dividend or distribution’’(i.e., cash dividends and distributions for which noadjustment is made). The changes in Part II reflectchanges made to eliminate the need to round adjustedexercise prices in certain circumstances and to providemore precise compensation for fractional shares elimi-nated by rounding.

Parts III-V of this Supplement supersede andreplace the February 2003 Supplement to the Booklet.Part III pertains to options on interests in investment com-panies and similar entities. Part IV pertains to specialexercise settlement procedures or restrictions that maybe imposed upon the occurrence of certain extraordinaryevents. Part V discloses that a registration statement andprospectus for the options covered by the Booklet are nolonger available.

Part VI pertains to an expansion of OCC’s authorityto adjust the multiplier for yield-based Treasury optionsand to fix the cash settlement amount for such options incertain circumstances. Part VII reflects the adoption ofrules by certain options markets that permit, in very lim-ited circumstances, the cancellation or adjustment of atransaction entered into at a premium based on an erro-neously reported value for the underlying interest.Part VIII, which supersedes paragraph 1 of theMarch 2000 Supplement to the Booklet, pertains to theacceleration of the expiration date of options on equitysecurities in certain circumstances.

Part I. Definition of Ordinary CashDividend or Distribution.

The fourth paragraph on page 19 is amended toread as follows:

As a general rule, no adjustment is made for ordinarycash dividends or cash distributions. A cash dividend ordistribution announced prior to February 1, 2009, will gener-ally be considered ‘‘ordinary’’ unless it exceeds 10% of theaggregate market value of the underlying security out-standing as of the close of trading on the declarationdate. The same rule will continue to apply on and after that

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date with respect to options series designated by OCCas ‘‘grandfathered’’ for purposes of this rule (i.e., seriesopened prior to publication of this Supplement thatremain outstanding on February 1, 2009). In the case ofall other options series, a cash dividend or distributionannounced on or after February 1, 2009, will generally beconsidered ‘‘ordinary,’’ regardless of size, if OCCbelieves that it was declared pursuant to a policy or prac-tice of paying such dividends or distributions on a quar-terly or other regular basis (and no adjustment will nor-mally be made for any cash dividend or distribution thatamounts to less than $12.50 per contract). As an excep-tion to the general rule, options on fund shares will gener-ally be adjusted for capital gains distributions even ifmade on a regular basis, and adjustments may be madefor certain other distributions in respect of fund shares inspecial circumstances described in OCC’s rules, pro-vided in each case that the amount of the adjustmentwould be $.125 or more per fund share. Determinationswhether to adjust for cash dividends or distributions notcovered by the preceding rules, or when other specialcircumstances apply, are made on a case-by-case basis.

Part II. Adjustment of Exercise Prices.The first seven paragraphs on page 20 of the Booklet

are deleted in their entirety, and the following material isinserted in lieu thereof.

Stock dividends, stock distributions and stock splitsmay result in an adjustment of the number of optionsheld or written or the number of underlying shares, and insome cases may also result in an adjustment of the exer-cise price.

Stock Options with Exercise Prices Stated inFractions

As of the date of this Supplement, exercise pricesfor stock options are stated in points and fractions of apoint (e.g., 203⁄8 or 301⁄2). The smallest fraction is 1⁄8. Thefollowing adjustment rules apply to any series of stockoptions whose exercise price is stated in points and frac-tions of a point:

As a general rule, a 2 for 1 or a 4 for 1 stock split,stock distribution or stock dividend will result in the num-ber of outstanding options being proportionatelyincreased and the exercise price being proportionatelydecreased.

EXAMPLE: Before a 2 for 1 stock split, an investorholds an option on 100 shares of XYZ stock with anexercise price of $60. After adjustment for the split, he willhold two XYZ options, each on 100 shares and each withan exercise price of $30.

A stock dividend, stock distribution or stock splitother than a 2 for 1 or a 4 for 1 distribution or split willnormally result in an adjustment in the number of sharesdeliverable upon exercise, while the aggregate exerciseprice for the contract remains unchanged.

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EXAMPLE: An investor holds a call option covering100 shares of XYZ stock with an exercise price of $50resulting in an aggregate exercise price for the contractof $5,000 ($50 � 100). After a 3 for 2 split, the deliverablecould be increased to 150 shares while the nominal exer-cise price remained $50. In that case, upon exercise ofthe adjusted option, the investor would still pay $5,000($50 � 100, not $50 � 150), but would receive150 shares of XYZ stock instead of 100.

Note in the preceding example that, although thenumber of shares deliverable was adjusted to be 150, thenumber by which the unadjusted exercise price of $50was multiplied to determine the total exercise price con-tinued to be 100 rather than 150. Similarly, premium quo-tations would continue to be multiplied by 100 to obtainthe total premium to be paid for a single option.

Stock Options with Exercise Prices Stated inDecimals

In the future, the exchanges may introduce stockoptions with exercise prices stated in points anddecimals (e.g., 20.15 or 30.80). The following adjustmentrules would apply to any series of stock options whoseexercise price is stated in points and decimals:

When a stock distribution, stock split or stock divi-dend results in the issuance of one or more whole sharesof stock for each outstanding share—such as a 2 for 1 ora 3 for 1 stock split—as a general rule the number ofunderlying shares will not be adjusted. Instead, the num-ber of outstanding options will be proportionatelyincreased and the exercise price will be proportionatelydecreased. (See the example of a 2 for 1 stock split under‘‘Stock Options with Exercise Prices Stated in Fractions’’above.)

Other stock dividends, stock distributions and stocksplits may result in an adjustment in the number of under-lying shares and the exercise price.

EXAMPLE: An investor bought an XYZ 50 option—either a call or a put—and XYZ Corporation subsequentlyeffected a 3 for 2 stock distribution. Instead of covering100 shares of stock at an exercise price of $50 a share,each outstanding option could be adjusted to cover150 shares at an exercise price of $33.33 per share. Theaggregate exercise price remains substantially the samebefore and after the adjustment ($50 � 100 = $5,000and $33.33 � 150 = $4,999.50).

All Stock OptionsAs a general rule, adjustments in exercise prices are

rounded to the nearest exercise price increment (1⁄8 or onecent, as the case may be), and adjustments in the numberof underlying shares are rounded down to eliminate frac-tional shares. In the latter case, the property deliverableupon exercise may be adjusted to include the value of theeliminated fractional share, as determined by OCC.

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Note that in the preceding example where the exer-cise price of the adjusted XYZ option was rounded down,the exercising put holder or assigned call writer wouldlose $.50 as a result of the rounding. Rounding up couldresult in losses to exercising call holders and assignedput writers.

A reverse stock split, combination of shares, or simi-lar event will generally result in an adjustment in thenumber of shares deliverable upon exercise, while theaggregate exercise price remains unchanged.

EXAMPLE: An investor holds a call option covering100 shares of XYZ stock with an exercise price of 50resulting in an aggregate exercise price for the contractof $5,000 ($50 � 100). After a 1 for 10 reverse split, thedeliverable could be reduced to 10 shares while the nom-inal exercise price remained $50. In that case, upon exer-cise of the adjusted option, the investor would still pay$5,000 ($50 � 100, not $50 � 10), but would receive10 shares of XYZ stock instead of 100.

As a general rule, no adjustment is made for ordi-nary stock dividends or distributions. A stock dividend ordistribution will generally be considered ‘‘ordinary’’ if(i) the number of shares distributed does not exceed 10%of the number of shares outstanding on the declarationdate and (ii) it is declared pursuant to a policy or practiceof paying such dividends or distributions on a quarterlybasis.

Distributions of property other than the underlyingsecurity may result in the adjustment of outstandingoptions to include the distributed property.

Part III. Options on Fund Shares.To reflect a broadening of the definition of ‘‘fund

shares,’’ the Booklet is amended as follows:The first full paragraph on page 2 of the Booklet is

amended to read:Each options market selects the underlying inter-

ests on which options are traded on that market. Optionsare currently available covering four types of underlyinginterests: equity securities (which term includes ‘‘fundshares’’ described in Chapter III), stock indexes, govern-ment debt securities, and foreign currencies. Options onother types of underlying interests may become availablein the future.

The first paragraph of Chapter III, appearing onpage 18 of the Booklet, is amended to read:

The term ‘‘stock options’’ is used broadly in thisBooklet to include not only options on common stocksbut also options on all other types of equity securities,such as limited partnership interests, ‘‘American Deposi-tary Receipts’’ and ‘‘American Depositary Shares’’ repre-senting interests in foreign entities, preferred stocks, andfund shares. The term ‘‘fund shares’’ includes interests inexchange-traded funds and other entities holding or trad-ing in one or more types of investments, and as used inthis Booklet the term ‘‘equity securities’’ includes fundshares.

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The first paragraph under the caption ‘‘FEATURESOF STOCK OPTIONS’’ on page 18 of the Booklet isamended to read:

As a general rule, a single stock option covers100 shares of the underlying security, although in thecase of options covering fund shares, options covering100 or 1000 shares may be available. Other stockoptions departing from the general rule may be intro-duced in the future. The number of underlying sharescovered by any stock option may be adjusted after theoption is issued if certain events occur, as describedbelow.

The fourth paragraph on page 19 of the Booklet isamended as set forth in Part I of this Supplement.

Part IV. Special Exercise SettlementProcedures/Restrictions.

Three new paragraphs are added on page 78 of theBooklet at the end of the section headed ‘‘8.’’ The newparagraphs read:

If OCC determines that the primary market(s) forone or more component securities of an underlying indexdid not open or remain open for trading, or that the com-ponent security or securities did not open or remain openfor trading on the primary market(s), on a trading day ator before the time when the exercise settlement value forthat trading day would ordinarily be determined, or that acurrent index value or other price or value needed tocalculate the exercise settlement value for an indexoption is otherwise unreported, inaccurate, unreliable,unavailable or inappropriate for purposes of calculatingthe cash settlement amount, then OCC may suspendsettlement obligations for exercised and assigned con-tracts of the affected series. In the event of such a sus-pension, OCC will fix a new settlement date after OCCdetermines that the exercise settlement value is availableor after OCC fixes the exercise settlement value.

If OCC determines to fix the exercise settlementvalue, it will act through an adjustment panel that will useits judgment as to what is appropriate for the protectionof investors and the public interest. For a description ofadjustment panels, see ‘‘Adjustment and AdjustmentPanels’’ in Chapter II. The panel may fix the exercisesettlement value using the reported price or value of therelevant security or securities or index (i) at the close ofregular trading hours (as determined by OCC) on the lastpreceding trading day for which a price or value wasreported by the reporting authority, or (ii) at the openingof regular trading hours (as determined by OCC) on thenext trading day for which a price or value was reportedby the reporting authority. Alternatively, the panel may fixthe exercise settlement value using a price or value forthe relevant security or securities or index, or using acombination or average of such prices or values, at orduring such time or times that the panel sees fit.

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If an adjustment panel delays fixing an exercise set-tlement value for a series of index options past the lasttrading day before expiration of that series, normal expi-ration exercise procedures will not apply to the affectedseries. Instead, exercise settlement will be postponeduntil the next business day following the day when theadjustment panel fixes the exercise settlement value, andeach long position in the affected series will be treated ashaving been exercised if the exercise settlement amountper contract for that series is $1.00 or more. If the exer-cise settlement amount per contract is less than $1.00,the option will be treated as having expired unexercised.As a result of these procedures, holders of expiring indexoptions may not know whether their options have beenexercised, and writers of such options may not knowwhether they have been assigned an exercise notice,until after the expiration date. An adjustment panel’sdeterminations shall be conclusive, binding on all inves-tors, and not subject to review.

The first paragraph on page 41 of the Booklet isamended to read:

If OCC should determine that foreign governmentalrestrictions or taxes would prevent the orderly settlementof delivery foreign currency option exercises or wouldresult in undue burdens on OCC or its Clearing Mem-bers, OCC has the authority to impose special exercisesettlement procedures. These could range from techni-cal changes in delivery procedures to the fixing of U.S.dollar settlement prices. If special exercise settlementprocedures are imposed, investors may determine thenature of such procedures from their brokers.

The last paragraph on page 53 of the Booklet isamended to read:

In certain unusual circumstances, an event maythreaten to reduce the available supply of an underlyingsecurity to a level insufficient to allow settlement if all ofthe outstanding option contracts for the affected securitywere exercised. This could happen, for example, in theevent of a successful tender offer for all or substantiallyall of the outstanding shares of an underlying security orif trading in an underlying security were enjoined or sus-pended. If OCC in its discretion determines that a situa-tion of that type exists, OCC may impose special exercisesettlement procedures. These special procedures, appli-cable only when an assigned call writer or an exercisingput holder is unable to obtain the underlying security,may involve the suspension of the settlement obligationsof the holder and writer and/or the fixing of cash settle-ment prices in lieu of delivery of the underlying security.When special exercise settlement procedures areimposed, OCC will announce to its Clearing Membershow settlements are to be handled. Investors may obtainthat information from their brokerage firms.

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On page 61 of the Booklet, the second paragraph ofthe section headed ‘‘5.’’ is amended to read:

Exercise restrictions imposed by OCC and theoptions markets affecting cash-settled options generallycannot be continued in effect beyond the opening ofbusiness on the last trading day before their expiration.Such exercise restrictions affecting physical deliveryoptions generally cannot be continued beyond the open-ing of business on the tenth business day before theirexpiration.

Part V. Exemption of Standardized Options from1933 Act Registration.

Effective January 2, 2003, the SEC exempted stan-dardized options issued by a registered clearing agencyand traded on a registered national securities exchangeor association from the Securities Act of 1933, except forthe antifraud provisions of Section 17 of that Act. Effec-tive January 10, 2003, the SEC approved an amendmentto OCC’s most recent registration statement under thatAct terminating the registration of all unsold put and calloptions. As a result of these actions, the standardizedoptions covered by this Booklet are no longer required tobe registered under that Act; an OCC registration state-ment will no longer be available for inspection at OCC’soffice; and copies of an OCC prospectus for standard-ized options will no longer be available from OCC or theU.S. options markets.

Part VI. Yield-Based Treasury Options.The second full paragraph on page 34 is replaced

with the following paragraph:If the U.S. Department of the Treasury ceases to

issue, or changes the terms or the schedule of issuanceof, Treasury securities on which underlying yields arebased, an adjustment panel has discretion to adjust theterms of the series by substituting other Treasury securi-ties or to make such other adjustment as the adjustmentpanel may determine. If the options market on which aparticular yield-based option is traded should increase ordecrease the multiplier for the option, the adjustmentpanel has discretion to adjust outstanding optionsaffected by the change by proportionately consolidatingor subdividing them or by taking other action.

The paragraph numbered 9. on page 82 is replacedwith the following:

9. If OCC determines that the exercise settlementvalue of the underlying yield for any series of yield-basedoptions is unreported, inaccurate, unreliable, unavailable, orinappropriate for purposes of calculating the cash settle-ment amount of such series, OCC has the authority to sus-pend the settlement obligations of the exercising andassigned Clearing Members of options of such series or tofix the cash settlement amount for exercised options of suchseries or to do both. In the event of such a suspension, OCC

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will fix a new settlement date after OCC determines thatthe exercise settlement value is available or after OCCfixes the cash settlement amount.

If OCC determines to fix the cash settlementamount, it will act through an adjustment panel that willuse its judgment as to what is appropriate for the protec-tion of investors and the public interest. For a descriptionof adjustment panels, see ‘‘Adjustment and AdjustmentPanels’’ in Chapter II. The panel may fix the cash settle-ment amount using the reported value of the underlyingyield (i) at the close of regular trading hours (as deter-mined by OCC) on the last preceding trading day forwhich such a value was reported by the reporting author-ity or (ii) at the opening of regular trading hours (as deter-mined by OCC) on the next trading day for which such avalue was reported by the reporting authority. Alterna-tively, the panel may fix the cash settlement amountusing the value for the underlying yield, or using a combi-nation or average of such values, at or during such timeor times that the panel sees fit.

If an adjustment panel delays fixing a cash settle-ment amount for a series of yield-based options past thelast trading day before expiration of that series, normalexpiration exercise procedures will not apply to theaffected series. Instead, exercise settlement will be post-poned until the next business day following the day whenthe adjustment panel fixes the cash settlement amount,and each long position in the affected series will betreated as having been exercised if the cash settlementamount per contract for that series is $1.00 or more. If thecash settlement amount per contract is less than $1.00,the option will be treated as having expired unexercised.As a result of these procedures, holders of expiring yield-based options may not know whether their options havebeen exercised, and writers of such options may notknow whether they have been assigned an exercisenotice, until after the expiration date. An adjustmentpanel’s determinations shall be conclusive, binding on allinvestors, and not subject to review.

Part VII. Erroneously Reported Index Levels.The paragraph numbered 5. on page 76 is replaced

with the following paragraph, which omits a statementthat a person who buys or sells an index option at apremium based on an erroneously reported index level isbound by the trade and has no remedy. The omissionreflects the adoption of rules by certain options marketsthat permit, in very limited circumstances, the cancella-tion or adjustment of a transaction entered into at a pre-mium based on an erroneously reported value for theunderlying interest:

5. Holders and writers of index options generallybear the risk that the reported current index level may bein error. Persons who exercise cash-settled index optionsor are assigned exercises based on erroneously reportedindex levels will ordinarily be required to make settlementbased on the exercise settlement value as initially

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reported by the official source of the index, even if acorrected value is subsequently announced. Referencesherein to index values ‘‘as initially reported’’ refer to thevalues initially reported by the source of the index asdefinitive, and not to any tentative or preliminary valuesthat may be announced at an earlier time subject toadjustment. In extraordinary circumstances (e.g., wherean exercise settlement value as initially reported is obvi-ously wrong and inconsistent with values previouslyreported, and a corrected value is promptly announced),OCC has discretion to direct that exercise settlements bebased on a corrected exercise settlement value. Ordina-rily, however, the exercise settlement value as initiallyreported by the official source of the index will be conclu-sive for exercise settlement purposes.

Part VIII. Accelerated Expiration of Certain EquityOptions.

The second paragraph after the ‘‘EXAMPLE’’ onpage 21 of the Booklet, as amended by paragraph 1 ofthe March 2000 Supplement to the Booklet, is furtheramended to read:

When an underlying security is converted into aright to receive a fixed amount of cash, options on thatsecurity will generally be adjusted to require the deliveryupon exercise of a fixed amount of cash, and trading inthe options will ordinarily cease when the conversionbecomes effective. As a result, after such an adjustmentis made all options on that security that are not in themoney will become worthless and all that are in themoney will have no time value. If the option is European-style, the expiration date of the option will ordinarily beaccelerated to fall on or shortly after the date on whichthe underlying security is converted into a right to receivecash. After January 1, 2008, the same treatment will beextended to American-style options. Holders of anin-the-money option whose expiration date is acceler-ated must be prepared to exercise that option prior to theaccelerated exercise cut-off time in order to prevent theoption from expiring unexercised. See the discussion inChapter VIII under ‘‘How to Exercise.’’ Writers of optionswhose expiration date is subject to being acceleratedbear the risk that, in the event of such an acceleration,they may be assigned an exercise notice and be requiredto perform their obligations as writers prior to the originalexpiration date. When the expiration date of an option isaccelerated, no adjustment will be made to compensatefor the accelerated expiration date. There is no assur-ance that the exercise settlement date for an acceleratedoption will coincide with the date on which the cash pay-ment to the holders of the underlying security becomesavailable from the issuer. Covered writers of an acceler-ated option may therefore be required to pay the cashamount in respect of the option before they receive thecash payment on the underlying security.

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JUNE 2007SUPPLEMENT

The February 1994 edition of the booklet entitled Char-acteristics and Risks of Standardized Options, as amended(the ‘‘booklet’’), is further amended as provided below. Thechanges pertain to the trading of credit default options.

Credit default options, including credit default bas-ket options, have characteristics that are different fromthose of any other options described in the booklet at thedate of this Supplement. Accordingly, some of the state-ments and terms in Chapters I and II of the booklet areinapplicable to credit default options. For example, asfurther described in this booklet, the sentence at thebottom of page 1 and the top of page 2 which notes thatthe owner of a cash-settled option has ‘‘the right toreceive a cash payment based on the difference betweena determined value of the underlying interest at the timethe option is exercised and the fixed exercise price of theoption’’ is not applicable to credit default options. Thedescription of credit default options in this Supplementsupersedes material in the booklet applicable to otherstandardized options to the extent such material is incon-sistent with statements in this Supplement. Credit defaultoptions are described by amendment to Chapter V of thebooklet as follows:

The title of Chapter V (on page 29 of the booklet) ischanged to ‘‘DEBT OPTIONS AND CREDIT DEFAULTOPTIONS’’.

On page 29, the second and third paragraphs aredeleted and replaced with the following paragraphs:

A third kind of options, called credit default options, arecash-settled options that are related to the creditworthinessof issuers or guarantors of debt securities, and are exercisedupon confirmation of a credit event affecting an underlyingdebt security or securities.

The principal risks of holders and writers of debtoptions and credit default options are discussed in Chap-ter X. Readers interested in buying or writing debt options orcredit default options should not only read this chapter butshould also carefully read Chapter X, particularly the discus-sions under the headings ‘‘Risks of Option Holders,’’ ‘‘Risksof Option Writers,’’ ‘‘Other Risks,’’ ‘‘Special Risks of DebtOptions’’ and ‘‘Special Risks of Credit Default Options.’’

On page 34, the following is inserted immediately fol-lowing the last paragraph:

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Credit Default Options andCredit Default Basket Options

Credit default options are based on debt securities ofone or more issuers or guarantors other than the U.S. Trea-sury. A significant difference between such debt securitiesand Treasury securities is the non-negligible risk that anissuer or guarantor of debt securities other than Treasurysecurities may default on its obligations. For example, theissuer might not pay the full interest and face amount of thesecurities when due or might file for bankruptcy, therebymaking it nearly certain that it will not make timely paymentof the full interest and face amount. Financial market partici-pants call this credit risk. Credit risk is an important compo-nent of the value of most debt securities.

Credit default options relate to the credit risk presentedby one or more specified debt securities, called referenceobligation(s), of one or more specified issuers or guarantors,each of which is called a reference entity. The referenceobligation(s) and each reference entity for a class of creditdefault options are selected by the listing options market.When a credit default option is based on reference obliga-tion(s) of more than one issuer or guarantor, it is referred toas a credit default basket option. There are further variationson credit default basket options as described below.

A credit default option is automatically exercised andpays a fixed cash settlement amount if a credit event isconfirmed for one or more reference obligations of a refer-ence entity prior to expiration of the option. The referenceobligations of a reference entity may include all of the out-standing debt securities constituting general obligations ofthe reference entity or direct claims on the reference entities(excluding any non-recourse debt). A credit event includes afailure to make a payment on a reference obligation as wellas certain other events that the listing options market mayspecify at the time a class of credit default options is listed.The specified credit events will be defined in accordancewith the terms of the reference obligation(s). However, notevery event that might constitute an event of default by thereference entity under the terms of the reference obligationswill necessarily be specified by the listing options market asa credit event. Investors should be certain that they under-stand the various possible events that will or will not consti-tute credit events. The determination of whether a particularevent meets the criteria of a credit event, however defined,for a specific credit default option is within the sole discretionof the listing options market.

In order to result in automatic exercise of the option, acredit event must be confirmed to have occurred during thecovered period (i.e., the period between the initial listing ofthe series of options and the time specified by the optionsmarket as the last day of trading of the option series prior tothe expiration date). An event that would otherwise bedeemed a credit event will not result in an exercise of theoption if it occurs either before or after this period. A series ofcredit default options ordinarily does not expire until a speci-fied number of business days following the end of the cov-ered period in order to provide the listing options market anopportunity to confirm whether or not a credit event

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occurred within the covered period. If an event otherwisemeeting the definition of a credit event occurs after the endof the covered period but before the option expires, theoption will not be exercised and will expire worthless.

If the listing options market determines that a creditevent has occurred within the covered period for a class ofcredit default options, it will provide a credit event confirma-tion to OCC, and the options will be automatically exercised.Holders of the exercised options will receive, and writers willbe obligated to pay, the fixed cash settlement amount. IfOCC does not receive a credit event confirmation from thelisting options market before expiration of a series of creditdefault options, the options will expire worthless.

Credit default options are binary options in that theyhave a specified, all-or-nothing cash settlement amount.Credit default options, however, have additional uniquecharacteristics. For example, credit default options have noexercise price and cannot be in the money and have nointrinsic value. The discussion of these terms in Chapter Iand/or Chapter II of the booklet is therefore inapplicable tocredit default options. In addition, a credit default option isautomatically exercised whenever a credit event occurswithin the covered period. Credit default options are thus aunique style of options and are neither American-style norEuropean-style.

A credit default basket option is similar to an aggrega-tion of individual credit default options, each based on oneor more reference obligations of a different reference entity.All of the outstanding debt securities constituting generalobligations of each reference entity or direct claims on refer-ence entities (excluding non-recourse debt) in the basketmay be included in the reference obligations.

There are two different kinds of credit default basketoptions. A single payout credit default basket option is auto-matically exercised and pays a specified cash settlementamount upon the confirmation of the first credit event tooccur with respect to a reference obligation of any one of thebasket’s reference entities. It is exercised only once. Onceexercised, the expiration of the option will be accelerated tocorrespond to the exercise date. A multiple payout creditdefault basket option automatically pays a specified cashsettlement amount each time a credit event is confirmed withrespect to a reference obligation of any one of the referenceentities during the covered period. In the case of either sin-gle payout or multiple payout credit default basket options,the listing options market may specify a different cash settle-ment amount for different reference entities or may specifythe same cash settlement amount for each reference entityin the basket. The percentage of the total cash settlementamount that is attributable to any individual reference entityis referred to as its weight in the basket. Investors shouldnote that the options markets on which credit default basketoptions trade may determine ‘‘weight’’ according to theirown specified rules, and investors should contact the listingoptions market for information about how it determinesweight. In the case of a multiple payout credit default basketoption, a cash settlement amount will be paid only once withrespect to any particular reference entity, after which time

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the affected reference entity will be removed from the creditdefault basket.

Premiums for both credit default options and creditdefault basket options are expressed in points anddecimals. In order to obtain the aggregate premium for asingle option, the quoted premium is multiplied by a pre-mium multiplier specified by the listing options market.

ADJUSTMENT OF CREDIT DEFAULT OPTIONS

Adjustments may be made to the standardized termsof outstanding credit default options when certain eventsoccur, such as a succession event or a redemption event,both of which will be defined by the listing options market inaccordance with the terms of the reference obligations.Adjustments of credit default options will be within the solediscretion of the listing options market. Investors shouldfamiliarize themselves with the listing options market’s rulesand procedures governing credit default option adjust-ments. The listing option market’s rules governing adjust-ments of outstanding options may be changed with regula-tory approval, and the listing options market may haveauthority to make such exceptions as it deems appropriateto its general adjustment rules.

Redemption Event Adjustments. A redemption eventoccurs when reference obligations of a reference entity areredeemed (or paid in full) by, or on behalf of, the issuer. In thecase of all types of credit default options, if only some of thereference obligations are redeemed, the option is ordinarilyadjusted such that the remaining reference obligations arethe reference obligations for the option and no other adjust-ment will ordinarily be made. If all of the reference obliga-tions of a reference entity are redeemed and there are otherdebt obligations of the reference entity that the listingoptions market deems appropriate to specify as successorreference obligations, then they will be substituted as thereference obligations. If, however, all of the reference obliga-tions of a reference entity are redeemed and there are noother debt obligations of the reference entity that the listingoptions market deems appropriate to specify as successorreference obligations for the reference entity (a completeredemption), then the adjustment will depend upon whetheror not there are other reference entities for the options.

Adjustment of credit default options for a completeredemption. If there is a complete redemption affecting acredit default option, the option will cease trading on thedate that the redemption event is confirmed by the listingoptions market. Expiration of the option will be acceleratedto a specified number of days following the confirmationdate of the redemption, and the option will expire unexer-cised if, prior to such expiration, no credit event is confirmedto have occurred prior to the effective date of the redemptionevent.

EXAMPLE: Company XYZ is the reference entity for acredit default option contract and its 8% May 15, 2022 bondissue is the only reference obligation. During the life of theoption, Company XYZ redeems the 8% May 15, 2022 bondissue and there are no other obligations of Company XYZ

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that the listing options market deems to be suitable for spec-ifying as successor reference obligations. The option willcease trading on the confirmation date, and its expirationdate will be accelerated. If no credit event is confirmed tohave occurred within the covered period, the option willexpire worthless.

Adjustment of credit default basket options for a com-plete redemption. In the case of a single or multiple payoutcredit default basket option, if a complete redemption eventoccurs with respect to one of the reference entities in thebasket and no credit event is confirmed, pursuant to therules of the listing options market, to have occurred prior tothe effective date of such redemption event, the options willbe adjusted by removing the affected reference entity fromthe basket of reference entities. When a reference entity isdeleted from the basket of reference entities because of aredemption event, the cash settlement amount of the optionwill be reduced by an amount reflecting the weight of thedeleted reference entity in the basket. The relative weights ofthe other components in the basket will remain unchanged,although each will represent a proportionally larger percent-age of the adjusted cash settlement amount.

EXAMPLE: Company XYZ is one of ten reference enti-ties for a class of multiple payout credit default option con-tracts and its 8% May 15, 2022 bond issue is specified as itsonly reference obligation. Company XYZ was assigned aweight of 15% when the credit default option was opened fortrading. During the life of the option, Company XYZ redeemsthe 8% May 15, 2022 bond issue. No reference obligationsremain and the listing options market determines that thereare no other outstanding debt obligations of the issuer suita-ble for specification as reference obligations. The basketcomponent will be removed from the credit default basket,and the cash settlement amount will be reduced by 15%.

Succession Event Adjustments. A succession eventoccurs when one or more new entities assume one or morereference obligations of a reference entity or become theobligor with respect to any obligation that is substituted forthe original reference obligations. This may occur, for exam-ple, when a reference entity is merged into a new entity orspins off a part of its business into a new entity. If, as theresult of a succession event, more than one entity is theobligor of the original reference obligations, or obligationsthat were substituted for the original reference obligations,all of those obligors, including, as the case may be, theoriginal reference entity, are referred to as successor refer-ence entities.

Adjustment of credit default options after a successionevent. Where a succession event results in assumption of allreference obligations by a single entity, the listing optionsmarket will ordinarily adjust the option by substituting theentity that assumes the reference obligation(s) as the newreference entity. Where a succession event results in morethan one successor reference entity, the credit default optionmay be adjusted by dividing it into two or more options.

EXAMPLE: Company XYZ is the reference entity for acredit default option contract, and its 8% May 15, 2022 bondissue is the only reference obligation. During the life of the

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option, Company XYZ spins off Company LMN. CompanyXYZ remains the obligor with respect to 70% of the principalamount of the original reference obligation. Company LMNbecomes the obligor of a new reference obligation that isissued to holders of the remaining 30% of the original refer-ence obligation. Company XYZ and LMN are identified bythe listing options market as the successor entities. Follow-ing the succession event, the credit default option based onCompany XYZ is adjusted into two separate credit defaultoption contracts that specify Company XYZ and CompanyLMN as reference entities. The cash settlement amount ofthe original credit default option and the premium multiplierare allocated between the new credit default options inaccordance with the 70/30 division of the reference obliga-tion as specified by the listing options market.

Adjustment of credit default basket options after a suc-cession event. When a succession event occurs with respectto a reference entity that is included in a single payout ormultiple payout credit default basket option, the listingoptions market will ordinarily adjust the option by replacingthe affected reference entity with the successor entity orentities, and, if one or more new obligations are issued toreplace some or all of the existing reference obligations, thenew obligations will be substituted as the reference obliga-tions. The listing options market will specify the weight ofeach new reference entity, and the sum of the weights willequal the weight of the original reference entity.

EXAMPLE: Company XYZ is one of ten equallyweighted reference entities for a multiple payout default bas-ket option and its 8% May 15, 2022 bond issue and its 8.5%September 1, 2030 bond issue are specified as its onlyreference obligations. During the life of the option, CompanyXYZ spins off Company LMN. Company XYZ remains theobligor for the 2022 bond issue and LMN becomes the obli-gor of a debt security issued to holder of the 2030 bondissue. The listing options market adjusts the option by speci-fying XYZ and LMN as the successor reference entities. Thereference obligations are the original 2022 bond issue andthe replacement for the 2030 bond issue. The listing optionsmarket determines the appropriate basket weight for thesuccessor reference entities is 7.5% and 2.5%. The sum ofthe newly specified weights equals the 10% weight of thepredecessor basket reference entity (Company XYZ)replaced by the successor reference entities (Company XYZand Company LMN).

On page 88, the following is inserted immediately fol-lowing the last paragraph:

SPECIAL RISKS OF CREDIT DEFAULT OPTIONS

1. Pricing of credit default options is complex. Asstated elsewhere in this document, complexity not wellunderstood is, in itself, a risk factor. In order to price theseoptions, investors must estimate the probability of defaultfrom available security or other prices, primarily bond andcredit default swap (‘‘CDS’’) prices. Models typically used bymarket professionals to infer the probability of default fromprices may be more complex than the average investor isused to.

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2. The sources of price information used to pricecredit default options are subject to a lack of transparencyand, at times, illiquid markets. This is attributable to, amongother things: (1) the absence of last sale information and thelimited availability of quotations for the reference obliga-tion(s), (2) lack of ready availability of information on relatedproducts traded primarily in the over-the-counter market,and (3) the fact that related over-the-counter market creditderivative transactions are privately negotiated and may notbe made public in a timely fashion or at all.

3. Dealers in the underlying debt securities and inthe over-the-counter credit derivatives markets have accessto private quotation networks that give actual current bidsand offers of other dealers. This information is not availableto most investors. As a result, these dealers may have anadvantage over participants with regard to credit defaultoptions.

4. If the listing options market determines that acredit default option is subject to a redemption event (i.e.,the issuer or guarantor pays off the reference obligation), theoption will expire worthless unless a credit event has beenconfirmed to have occurred prior to the effective date of theredemption event. As a result, purchasers of such optionswill lose their premium since there is no chance of occur-rence of a credit event for the reference entity. On the otherhand, if a redemption event occurs but a credit event isconfirmed to have occurred prior to the effective date of theredemption event, a seller would be obligated to pay thecash settlement amount even though a holder of the refer-ence obligation may not incur a loss.

5. Since succession events are determined by thelisting options market, credit default options may be modi-fied to specify a different reference entity or several differentreference entities. As a result, there may be new referenceobligations that have higher or lower credit quality than theoriginal reference obligation. In addition, other factors mayexist that could affect the likelihood of the occurrence of acredit event. As a result, the occurrence of a successionevent could affect the price of these options. Moreover, sincethe listing options market determines whether a successionevent occurred and the adjustment resulting from such anevent, the adjustment made to these options may be atvariance with the treatment given to the same successionevent with respect to related credit derivative products.

6. The occurrence of a credit event must be con-firmed by the listing options market. This means that therewill be a lag time between the actual occurrence of a creditevent and the listing options market’s confirmation of thecredit event. Rules of the options market may provide aspecified time period (e.g., four business days) between theend of the covered period and the expiration date for a seriesof credit default options to allow the options market to con-firm whether a credit event occurred during the coveredperiod. There is a risk, however, that the sources used tomonitor a credit event may not identify and report a creditevent in a timely fashion. For example, it is possible that acredit event could occur on the last day of trading, but thesources which report the occurrence of a credit event do not

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make this information publicly available until after the expira-tion date. In this case, the cash settlement value of a creditdefault option would be zero. There is also a risk that thelisting options market may determine that a credit event hasoccurred based on information available to it when in fact nocredit event has occurred. This could happen, for example, ifthe sources used to confirm the credit event are erroneous.The rules of OCC and/or the listing options market mayprovide that a confirmation of a credit event or other contractadjustment may be revoked up to a specified time prior toexercise settlement. Settlements based on a listing optionsmarket’s confirmation of a credit event are irrevocable even ifno credit event has occurred.

7. Every determination by the listing options marketof a redemption event, succession event or credit event willbe within the listing options market’s sole discretion and willbe conclusive and binding on all holders and sellers and notsubject to review. OCC shall have no authority to make suchdeterminations and shall have no responsibility therefor.

8. Prior to the period when a credit default optionhas been automatically exercised, the only means throughwhich the holder can realize value from the option is to sell itat its then market price in an available secondary market. If asecondary market for such an option is not available, it willnot be possible for its holder to realize any value from theoption at that time.

9. There is no underlying interest for credit defaultoptions that is quoted in the marketplace. Because of this,there are no underlying interest prices to provide a referenceto investors for pricing credit default options.

10. As discussed above under the caption ‘‘OtherRisks,’’ options markets have discretion to halt trading in anoption in certain circumstances — such as when the marketdetermines that the halt would be advisable in maintaining afair and orderly market in the option. In the case of creditdefault options, options markets may take into considera-tion, among other factors, that current quotes for debt secu-rities or other securities of the reference entity are unavaila-ble or have become unreliable.

11. The risk that a trading market for particularoptions may become unavailable and the potential conse-quences are also discussed above under the caption ‘‘OtherRisks.’’ The SEC has approved certain credit default optionsfor listing and trading on a national securities exchange assecurities. OCC filed its rules for clearing credit defaultoptions with the CFTC, and the CFTC issued an exemptionpermitting OCC to clear such options when traded on anational securities exchange whether or not they are withinthe CFTC’s jurisdiction. By its terms, the exemption is revo-cable, and its revocation would be one of the events thatcould lead to the unavailability of a trading market for creditdefault options.

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JUNE 2008SUPPLEMENT

This supplement supersedes and replaces the April2008 Supplement to the booklet entitled Characteristicsand Risks of Standardized Options (the ‘‘Booklet’’). Thissupplement adds information regarding the followingnew options products: delayed start options, binarystock options, binary index options, and range options.

The third paragraph on page 1 of the Booklet isreplaced with the following paragraph:

What is an option? An option is the right to buy orsell a specified amount or value of a particular underlyinginterest at a fixed exercise price by exercising the optionbefore its specified expiration date. An option whichgives the right to buy is a call option, and an option whichgives a right to sell is a put option. Calls and puts aredistinct types of options, and buying or selling of onetype does not involve the other. Certain special kinds ofoptions may give a right to receive a cash payment ifcertain criteria are met.

The last paragraph on page 1 of the Booklet, whichcontinues on the top of page 2, is replaced with the fol-lowing paragraph:

There are two different kinds of options — physicaldelivery options and cash settled options. A physicaldelivery option gives its owner the right to receive physi-cal delivery (if it is a call), or to make physical delivery (if itis a put), of the underlying interest when the option isexercised. A cash-settled option other than a binaryoption or a range option gives its owner the right toreceive a cash payment based on the difference betweena determined value of the underlying interest at the timethe option is exercised and the fixed exercise price of theoption. A cash-settled call conveys the right to receive acash payment if the determined value of the underlyinginterest at exercise — this value is known as the exercisesettlement value — exceeds the exercise price of theoption, and a cash-settled put conveys the right toreceive a cash payment if the exercise settlement value isless than the exercise price of the option. Binary optionsand range options are special kinds of cash-settledoptions described in Chapter II. The examples in thisbooklet generally refer to options other than binaryoptions or range options except as otherwise stated.

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The second full paragraph on page 2 of the Bookletis replaced with the following paragraph:

Most options have standardized terms — such asthe nature and amount of the underlying interest, theexpiration date, the exercise price, whether the option isa call or a put, whether the option is a physical deliveryoption or a cash-settled option, the manner in which thecash payment and the exercise settlement value of acash-settled option are determined, the multiplier of acash-settled option, the exercise price setting date andexercise price setting formula of a delayed start option,the style of the option, whether the option has automaticexercise provisions, and adjustment provisions. Thesestandardized terms are generally described in Chapter II.Each U.S. options market publishes specification sheetssetting forth the particular standardized terms of theoptions traded on that options market. (The options mar-kets may also provide for trading in options whose termsare not all fixed in advance. Rather, subject to certainlimitations, the parties to transactions in these optionsmay designate certain of the terms. These flexibly struc-tured options are discussed in Chapter VII of thisbooklet.)

The first two paragraphs on page 7 of the Bookletare replaced with the following paragraphs:

The exercise price of a cash-settled option (otherthan a binary option or a range option) is the base for thedetermination of the amount of cash, if any, that theoption holder is entitled to receive upon exercise (see thediscussion of ‘‘Cash Settlement Amount and ExerciseSettlement Value’’ below). The exercise price of a binaryoption is the value or level of the underlying interestabove, below, or, in some cases, at which the option willbe in the money at expiration, thereby causing the fixedcash settlement amount to become payable (see the‘‘Binary Option’’ definition below). In the case of a rangeoption, the exercise price is the option’s range length(see the ‘‘Range Option’’ definition below).

Exercise prices for each options series (except forseries of delayed start options) are established by theoptions market on which that series is traded at the timetrading in the series is introduced, and are generally setat levels above and below the then market value of theunderlying interest. The options markets generally haveauthority to introduce additional series of options withdifferent exercise prices based on changes in the value ofthe underlying interest, or in response to investor inter-est, or in unusual market conditions, or in other circum-stances. For series of delayed start options, exerciseprice setting formulas — rather than exercise prices —

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are established by the options market on which eachseries is traded before the time trading commences ineach such series. Those exercise price setting formulasprovide that on the exercise price setting date the exer-cise price for the series will be fixed at the money, in themoney by a certain amount, or out of the money by acertain amount.

The first paragraph following the paragraph titled‘‘Style of Option’’ on page 7 of the Booklet is replacedwith the following paragraph:

Each American-style option other than a delayedstart option may be exercised at any time prior to itsexpiration. An American-style delayed start option maybe exercised at any time after its exercise price is set andbefore its expiration date.

The following paragraphs are inserted immediatelypreceding the paragraph captioned ‘‘Unit of Trading;Contract Size’’ on page 8 of the Booklet:

BINARY OPTION — A binary option is acash-settled option having only two possible payoff out-comes; either a fixed amount or nothing at all. Somebinary options are referred to as ‘‘fixed return options.’’As of the date of this Supplement, the only binary optionsapproved for trading (other than credit default options, asdefined below) are binary stock options, which are binaryoptions on individual equity securities, including fundshares; and binary index options, which are binaryoptions on broad-based securities indexes (includingvolatility indexes). The binary options currently tradedare all subject to automatic exercise. The holder of abinary option other than a credit default option has theright to receive (and the writer of a binary option has theobligation to pay) the exercise settlement amount for theoption if the value of the underlying interest as of the timespecified by the applicable listing options market (i.e.,the exercise settlement value) meets the criteria for auto-matic exercise of the option, as specified in the rules ofthe listing options market. If those criteria are not met, theoption will expire worthless. Credit default options are aspecific kind of binary option discussed at the end ofChapter V. Except for credit default options, binaryoptions are European-style options.

RANGE OPTION — A range option is a European-style, cash-settled option that has a payout if the value ofthe underlying interest falls within a specific range ofvalues (the range length) at expiration. As the underlyinginterest value increases throughout the range length, theamount of the payout (i.e., the cash settlement amount)of the range option increases linearly to a maximum

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value, remains constant at that value through the middleof the range length and then decreases linearly to zero asthe value of the underlying continues to increase to thetop of the range length. A more detailed description ofthis feature of range options is set forth below under thecaption ‘‘Cash Settlement Amount and Exercise Settle-ment Value.’’ Range options are of a single type ratherthan consisting of puts and calls.

The second paragraph under the caption ‘‘Unit ofTrading; Contract Size’’ on page 8 of the Booklet isreplaced with the following paragraph:

The contract size of a cash-settled option other thana binary option or a range option is determined by themultiplier that is fixed by the options market on which theoptions series is traded. The multiplier determines theaggregate value of each point of the difference betweenthe exercise price of the option and the exercise settle-ment value of the underlying interest. For example, amultiplier of 100 means that for each point by which acash-settled option is in the money upon exercise, thereis a $100 increase in the cash settlement amount. Simi-larly, if an option with a multiplier of 100 is trading at apremium of, say, $4, then the aggregate premium for asingle option contract would be $400. The contract sizeof a range option is determined by the option’s multiplierand its maximum range exercise value. The contract sizeof a binary option is its cash settlement amount, which isfixed by the options market for any series of binaryoptions at or before the opening of trading in that series.Some options markets define the cash settlementamount for binary options as being the multiplier times afixed settlement value. Other options markets define thecash settlement amount for binary options without refer-ence to a multiplier.

The penultimate paragraph on page 9 of the Bookletis replaced with the following paragraph:

CASH SETTLEMENT AMOUNT, SETTLEMENTCURRENCY and EXERCISE SETTLEMENT VALUE —The cash settlement amount is the amount of cash thatthe holder of a cash-settled option is entitled to receiveupon exercise. In the case of a cash-settled option otherthan a binary option or a range option, it is the amount bywhich the exercise settlement value of the underlyinginterest of a cash-settled call exceeds the exercise price,or the amount by which the exercise price of acash-settled put exceeds the exercise settlement value ofthe underlying interest, multiplied by the multiplier for theoption.

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The following paragraphs are inserted following thecarry-over paragraph at the top of page 10 of the Booklet:

In the case of a binary option, the cash settlementamount is determined by the relevant listing options mar-ket and, whether or not established through use of amultiplier, is fixed and does not vary (except in the case ofcertain adjustments described below) regardless of theamount by which the exercise settlement value exceeds(in the case of a binary call option) or is less than (in thecase of a binary put option) the exercise price.

EXAMPLE: An investor holds a binary call optionon XYZ security that has an exercise price of $80 and afixed cash settlement amount of $100. If the exercisesettlement value of XYZ is $81 at expiration, the investorwill receive $100. If the exercise settlement value is $90,the investor will still receive $100. If, on the other hand,the exercise settlement value of XYZ at expiration isbelow $80, the investor will receive nothing, and theoption will expire worthless.

It is very important to note that the conditions underwhich a binary option returns a cash settlement amountmay vary depending upon the rules of the listing optionsmarket. Specifically, the listing options market may listbinary options that return a cash settlement amount if:(1) the exercise settlement value of the underlying isabove the exercise price (a binary call); or (2) the exer-cise settlement value of the underlying is below the exer-cise price (a binary put). In addition, certain binary calloptions return a cash settlement amount if the exercisesettlement value of the underlying is exactly equal to theexercise price.

EXAMPLE: Assume XYZ stock is the underlyingsecurity for a binary stock option with an exercise price of$80, and the exercise settlement value of XYZ at expira-tion is exactly $80. If the listing options market specifiedthat the option would return a cash settlement amount ifthe exercise settlement value was above the exerciseprice, the option will expire unexercised. If, however, thelisting options market specified that the option wouldreturn a cash settlement amount if the exercise settle-ment value was at or above the exercise price, the optionwould be automatically exercised at expiration.

In the case of a range option, the cash settlementamount varies depending on where the exercise settle-ment value of the underlying index falls within the rangelength at expiration. At the time a series of range optionsis opened for trading, the listing options market will spec-ify the range length as well as the range interval, which isa value equal to a certain number of index points that is

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used to divide the range length into three segments: thelow range, the middle range and the high range. The lowrange begins at the low end of the range length and endsone range interval higher. The high range begins onerange interval below the high end of the range length andends at the high end of the range length. The high rangeand the low range are of equal length. The middle rangeis the segment of values between the end of the lowrange and the beginning of the high range. The listingoptions market will also set a maximum range exercisevalue and a multiplier, the product of which is the maxi-mum cash settlement amount. This maximum cash set-tlement amount will be payable if the level of the underly-ing index falls anywhere in the middle range at expiration.Within the low range, the cash settlement amountincreases from zero to the maximum cash settlementamount as the level of the underlying index increases.Within the high range, the cash settlement amountdecreases from the maximum cash settlement amount tozero as the level of the underlying index continues toincrease.

EXAMPLE: Assume for a series of range indexoptions that the listing options market has specified arange length from 1000 to 1100, a range interval of 10, amaximum range exercise value of 10 and a multiplier of$100. The series therefore has a maximum cash settle-ment amount of $1,000 (multiplier times the maximumrange exercise value), a low range from 1000 to 1010, amiddle range from 1010 to 1090 and a high range from1090 to 1100. The table below summarizes the variationsin cash settlement amount based on the foregoingassumptions:

MiddleLow Range Range High Range

Value of theUnderlyingIndex . . . . . . Below 1000 1001 1002 ... 1009 1010� 1091 ... 1098 1099 1100 Above

1000 1090 1100

Cash SettlementAmount ($) . . . . 0 0 100 200 ... 900 1,000 900 ... 200 100 0 0

The last paragraph on page 12 of the Booklet isreplaced with the following paragraph:

Although holders of American-style options (otherthan delayed start options for which the exercise pricehas not yet been set) have the right to exercise at anytime before expiration, holders frequently elect to realizetheir profits or losses by making closing transactionsbecause the transaction costs of the closing transactionsmay be lower than the transaction costs associated withexercises, and because closing transactions may pro-vide an opportunity for an option holder to realize theremaining time value (described below) of the option thatwould be lost in an exercise. The holder’s only means of

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realizing profit or loss on a delayed start option before itsexercise price has been set, or on a European-style orcapped option when the option is not exercisable, is byselling the option in a closing transaction.

The first full paragraph through the sixth paragraphon page 14 of the Booklet are replaced with the following:

AT THE MONEY — This term means that the cur-rent market value of the underlying interest is the sameas the exercise price of the option. A range option, whichis of a single type rather than being categorized as a callor a put, is said to be at the money if the current level ofthe underlying index is at the top or bottom of the rangelength.

IN THE MONEY — A call option is said to be in themoney if the current market value of the underlying inter-est is above the exercise price of the option. A put optionis said to be in the money if the current market value ofthe underlying interest is below the exercise price of theoption. A range option, which is of a single type ratherthan being categorized as a call or a put, is said to be inthe money if the current level of the underlying index fallswithin its range length.

EXAMPLE: If the current market price of XYZstock is $43, an XYZ 40 call would be in the money by $3.

EXAMPLE: Assume a series of XYZ rangeoptions has a maximum cash settlement amount of$1,000, a low range from 1000 to 1010, a middle rangefrom 1010 to 1090 and a high range from 1090 to 1100. Ifthe current level of XYZ index is 1003, the option wouldbe in the money by $300. If the current level of XYZ indexis from 1010 to 1090, the option would be in the moneyby $1,000, the maximum cash settlement amount. If thecurrent level of XYZ index is 1093, the option would be inthe money by $700.

OUT OF THE MONEY — If the exercise price of acall is above the current market value of the underlyinginterest, or if the exercise price of a put is below thecurrent market value of the underlying interest, the call orput is said to be out of the money. A range option, whichis of single type rather than being categorized as a call ora put, is said to be out of the money if the current level ofthe underlying index falls outside of its range length.

EXAMPLE: With the current market price of XYZstock at $40, a call with an exercise price of $45 would beout of the money by $5 — as would a put with an exerciseprice of $35.

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EXAMPLE: Assume a series of XYZ rangeoptions has a specified range length from 1000 to 1100. Ifthe current level of XYZ index is either below 1000 orabove 1100, the series of XYZ range options would beout of the money.

INTRINSIC VALUE and TIME VALUE — It is some-times useful to consider the premium of an option asconsisting of two components: intrinsic value and timevalue.

In the case of an option other than a binary option,the intrinsic value reflects the amount, if any, by which theoption is in the money. An option that is out of the moneywould have an intrinsic value of zero. Delayed startoptions, other than series whose exercise prices are tobe set in the money, have no intrinsic value before theexercise price is set. Thereafter, as in the case of anyother option, whether a delayed start option has intrinsicvalue depends on the level of the underlying index at thetime. A binary option (other than a credit default option)that is in the money has an intrinsic value equal to thefixed cash settlement amount of the option. Where thelisting exchange has specified that a binary call will returna cash settlement amount if the exercise settlement valueof the underlying is exactly equal to the exercise price,the call will have an intrinsic value equal to the cashsettlement amount if it is either in the money or at themoney. As is further discussed under the heading ‘‘CreditDefault Options and Credit Default Basket Options’’ inChapter V, credit default options have no intrinsic value.

Time value is whatever the premium of the option isin addition to its intrinsic value. Time value is that part ofthe premium that reflects the time remaining before expi-ration. An American-style option may ordinarily beexpected to trade for no less than its intrinsic value priorto its expiration, although occasionally an American-styleoption will trade at less than its intrinsic value. BecauseEuropean-style options (including binary options andrange options) and capped options are not exercisableat all times, they are more likely than American-styleoptions to trade at less than their intrinsic value whenthey are not exercisable.

The following new paragraphs are added at the endof Chapter II, on page 17 of the Booklet:

A delayed start option is an option that does nothave an exercise price when first introduced for tradingbut instead has an exercise price setting formula pursu-ant to which the exercise price will be fixed on a specified

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future date. The following is a description of the terminol-ogy applicable to delayed start options:

EXERCISE PRICE SETTING DATE — The exerciseprice setting date for a series of delayed start options isthe date on which the options market on which the seriesis traded will set the exercise price for the series. Theexercise price setting date is specified before the com-mencement of trading of each series of delayed startoptions. Specific information regarding exercise pricesetting dates may be obtained from the listing optionsmarket.

EXERCISE PRICE SETTING FORMULA — Theexercise price setting formula for a series of delayed startoptions is the formula used by the options market onwhich the series is traded to set the exercise price for theseries on the exercise price setting date. The exerciseprice setting formula is specified before the commence-ment of trading of each series of delayed start option.The formula for a particular series may provide that theexercise price will be at the money, in the money by aspecified amount, or out of the money by a specifiedamount. Exercise prices may be rounded as specified bythe listing options market.

EXAMPLE: In January, an American-styledelayed start option on the ABC index is opened fortrading with an exercise price setting date of the thirdFriday in September and an exercise price settingformula specifying that the exercise price will be set at theclosing value of the ABC index on the exercise pricesetting date, rounded to the nearest whole number. Theoption may not be exercised at all until after the thirdFriday in September because it will not have an exerciseprice until that time. At the close of trading on the thirdFriday in September, the options market on which thedelayed start option is trading will determine the closingvalue of the ABC index and set the exercise price basedon that value. For example, if the options market deter-mines that the ABC index closed at 908.10 on the exer-cise price setting date, the options market would roundthat value to 908, and from that time until its expirationdate the delayed start option would trade as a regularAmerican-style option with an exercise price of 908.

The following paragraph is inserted immediately fol-lowing the caption ‘‘Features of Stock Options’’ onpage 18 of the Booklet:

The following discussion relates primarily to stockoptions other than binary stock options. A separatedescription of the features of binary stock options may befound at the end of this chapter.

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The following language is inserted immediately fol-lowing the last paragraph on page 22 of the Booklet.

The following is a description of certain special fea-tures of binary stock options:

As in the case of other stock options, the exerciseprice of a binary stock option is ordinarily stated as aprice per share of the underlying security. Premium val-ues may be stated in an amount that must be multipliedby a multiplier to obtain the premium price per optioncontract.

The listing exchange specifies the method for deter-mining the exercise settlement value of the underlyingstock for a binary stock option. This method may bebased on a volume weighted average price for a speci-fied time period preceding expiration, such as the lasttrading day before expiration. The exercise settlementvalue for a stock underlying a binary option is the value ofthe stock as reported by the reporting authority desig-nated by the listing options market for that purpose.Unless OCC directs otherwise, the value as initiallyreported by the reporting authority is conclusively pre-sumed to be accurate and deemed to be final for thepurpose of determining whether the option is automati-cally exercised and returns a cash settlement amount.This is true even if the value is subsequently revised ordetermined to have been inaccurate.

Adjustments in the terms of binary stock options willbe made to reflect some, but not all, of the same eventsthat result in adjustments to other stock options, and anyadjustment that is made will not necessarily be the sameas the adjustment made to other options on the sameunderlying security. As in the case of other stock options,adjustments will not normally be made to the terms ofbinary stock options to account for ordinary dividends ordistributions. The guidelines stated in Part I of the May2007 Supplement to this booklet for determining when adistribution is considered ‘‘ordinary’’ will generally beapplied to distributions with respect to securities underly-ing binary stock options.

Adjustments in the terms of binary stock options willordinarily be made for stock dividends, stock distribu-tions and stock splits, subject to the exception statedabove where an adjustment panel determines to treat astock distribution as ordinary.

If an adjustment panel determines to make anadjustment to binary stock options to reflect a stock divi-dend, stock distribution, or stock split, the exercise priceof the option will ordinarily be proportionately reduced —regardless of whether a whole number of shares, or other

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than a whole number of shares, of the underlying securityis issued. The adjustment panel has discretion to makeexceptions to the general rules described above.

EXAMPLE: Before a 2 for 1 stock split, an inves-tor holds one ABC binary stock option with an exerciseprice of $50 that pays a cash settlement amount of $100 ifthe exercise settlement value of ABC at expiration isabove the exercise price. After adjustment for the split,the investor will still hold one ABC binary stock optionthat pays a cash settlement amount if the exercise settle-ment value of ABC at expiration is above the exerciseprice, but the exercise price will be $25 (i.e., $50 dividedby two). Thus, if the exercise settlement value of ABCstock at expiration, on a post-split basis, is above $25,the investor will receive $100.

An investor holds an XYZ binary stock option withan exercise price of $50 that pays a cash settlementamount of $100 if the exercise settlement value of XYZstock is below the exercise price. XYZ announces a 2.5for 1 stock split. The exercise price will be adjusted toequal $20 ($50 divided by 2.5). If the exercise settlementvalue of XYZ stock at expiration is below $20, the investorwill receive $100. Exercise prices of binary stock optionswill generally be rounded to the nearest adjustmentincrement (or up in the event the adjusted price is equi-distant between two adjustment increments).

Conversely, in the event of a reverse stock split orcombination of shares, the exercise price will be propor-tionately increased.

Distributions of property other than the underlyingsecurity may result in adjustments to the terms of binarystock options. For example, the exercise settlementvalue might be adjusted to include the value of the dis-tributed property.

EXAMPLE: XYZ ‘‘spins off’’ its subsidiary ABC bydistributing to its stockholders two shares in ABC foreach share of XYZ. The exercise settlement value of XYZbinary stock options may be adjusted to include thevalue of two shares of ABC as well as one share of XYZ.

Alternatively, the option might be adjusted by reduc-ing its exercise price by an amount equal to the value ofthe property distributed with respect to a single share ofthe underlying security (in the example above, the twoshares of ABC).

As in the case of other stock options, adjustments tothe terms of binary stock options may result from eventsother than dividends, distributions, and splits. If all out-standing shares of an underlying security are acquired in

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a merger or consolidation, binary stock options may beadjusted so that the cash, securities or other propertyreceived by stockholders with respect to a single share ofthat underlying security becomes the underlying interest.Alternatively, an adjustment panel may determine to fix avalue for some or all of the non-cash property received.Where holders of an underlying security receive onlycash or an adjustment panel determines to fix a cashvalue for all non-cash property received, the aggregateper share value received, as determined by the adjust-ment panel, will become the exercise settlement value,trading in the options will ordinarily cease, options thatare out of the money will become worthless, the expira-tion date will ordinarily be accelerated, and options thatare in the money will be automatically exercised. Noadjustment in the fixed settlement amount will be madeto reflect the accelerated expiration date.

As in the case of other stock options, any adjust-ment decision with respect to binary stock options will bemade by an adjustment panel as described above. Theadjustment panel has discretion to make exceptions tothe general rules described above.

The first paragraph on page 23 of the Booklet underthe caption ‘‘About Indexes’’ is replaced with the follow-ing paragraph:

As referred to in this booklet, an index is a measureof the prices or other attributes of a group of securities*or other interests. Although indexes have been devel-oped to cover a variety of interests, such as stocks andother equity securities, debt securities and foreign cur-rencies, and even to measure the cost of living, the fol-lowing discussion relates only to indexes on equity secu-rities (which are called stock indexes in this booklet) andindexes that are intended to measure the predicted vola-tility of specified stock indexes (which are called volatilityindexes in this booklet) and options on such indexes(including binary index options and range options).

The second full paragraph on page 26 of the Bookletis replaced with the following paragraph:

The value level of every index underlying anoption — including the exercise settlement value — is thevalue of the index as reported by the reporting authoritydesignated by the options market where the option istraded as the official source for determining that index’s

* Some indexes reflect values of companies, rather thansecurities, by taking into account both the prices of con-stituent securities and the number of those securitiesoutstanding.

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value. Unless OCC directs otherwise, every value as ini-tially reported by the reporting authority is conclusivelypresumed to be accurate and deemed to be final for thepurpose of calculating the cash settlement amount, or, inthe case of a binary index option, whether the option isautomatically exercised and returns a cash settlementamount. This is true even if the value is subsequentlyrevised or determined to have been inaccurate.

The first two paragraphs immediately following thecaption ‘‘Features of Index Options’’ on pages 26-27 ofthe Booklet are replaced with the following paragraphsand example:

All index options that are traded on the date of thisbooklet are cash-settled. Cash-settled index options donot relate to a particular number of shares. Rather, the‘‘size’’ of a cash-settled index option is determined by themultiplier of the option. The ‘‘size’’ of a range option isdetermined by its multiplier and maximum range exer-cise value, and is equal to the maximum cash settlementamount (i.e., the maximum range exercise value timesthe multiplier). In the case of a binary index option, the‘‘size’’ of the contract is simply its fixed cash settlementamount, which for certain binary index options is definedas the product of a fixed settlement value times a multi-plier. If the option market on which an option series istraded should increase or decrease the multiplier for aseries of index options, an adjustment panel may adjustoutstanding options of that series.

The exercise prices and premiums of the indexoptions that are traded at the date of this booklet areexpressed in U.S. dollars. Subject to regulatory approval,trading in index options whose exercise prices or premi-ums are expressed in a foreign currency may be intro-duced in the future. The total premium and total exerciseprice for a single index option (other than a binary indexoption or a range option) are, respectively, the statedpremium and exercise price multiplied by the multiplier.

EXAMPLE: An investor purchases a December100 index call at $2.15. The multiplier for that option is100. The aggregate dollar amount of the premium is$215.00 ($2.15 times 100 = $215.00). Had the optionsmarket used a multiplier of 200, a premium of $2.15would have meant an aggregate premium of $430.00.

The second full paragraph on page 27 of the Bookletand the example following that paragraph are deleted.

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The second paragraph following the caption ‘‘Howto Exercise’’ on page 49 of the Booklet is replaced withthe following paragraph:

In order to exercise most options traded at the dateof this booklet, action must be taken by the option holderprior to the expiration of the option. However someoptions may be subject to automatic exercise. For exam-ple, capped options are subject to automatic exercise ifthe automatic exercise value of the underlying interesthits the cap price of the option, and certain other options(including binary options and flexibly structured indexoptions) are subject to automatic exercise as well. Binaryoptions are subject to automatic exercise if the exercisesettlement value of the underlying interest at expirationmeets the criteria for exercise specified by the listingoptions market. Credit default options are subject toautomatic exercise whenever a credit event occurs inaccordance with the description in the applicable supple-ment to this booklet.

The following paragraph is inserted near the top ofpage 58 of the Booklet immediately before the caption‘‘Risks of Option Holders’’:

Risks discussed in this chapter are applicable tobinary options and range options as well as otheroptions, except as otherwise noted. Certain risks dis-cussed in the section entitled ‘‘Special Risks of IndexOptions’’ are applicable to binary index options andrange options as well. Special risks applicable to holdersand writers of binary options are discussed in this chap-ter in the sections entitled ‘‘Special Risks of BinaryOptions (Other than Credit Default Options)’’ and ‘‘Spe-cial Risks of Credit Default Options.’’ Special risks appli-cable to holders and writers of range options are dis-cussed in this chapter in the section entitled ‘‘SpecialRisks of Range Options.’’

The following paragraph is inserted on page 59 of theBooklet immediately before the paragraph numbered 2:

Only the first two paragraphs of this numbered sec-tion 1 are applicable to binary options and range options.The amount by which a binary option is in the moneydoes not affect the value of the option (and therefore theoption holder’s profit or loss) upon exercise. In the caseof a range option, the value of the option is based onwhere the level of the underlying index falls within therange length at expiration, and not on the differencebetween the level of the underlying index and a discreteexercise price. Furthermore, as discussed below underthe caption ‘‘Special Risks of Range Options,’’ the valueof a range option does not always move in the samedirection as the underlying interest.

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The paragraph numbered 3 on page 60 of the Book-let is replaced with the following paragraph:

3. Prior to the period when a European-styleoption (including a European-style delayed start option),a capped option, or an American-style delayed startoption is exercisable, the only means through which theholder can realize value from the option (unless thecapped option is automatically exercised) is to sell it at itsthen market price in an available secondary market. If asecondary market for such an option is not availableduring the time the option is not exercisable, it will not bepossible for its holder to realize any value from the optionat that time.

The paragraph numbered 5 beginning at the bottomof page 60 of the Booklet is replaced with the followingparagraph:

5. The courts, the SEC, another regulatoryagency, OCC or the options markets may impose exer-cise restrictions. OCC and the options markets haveauthority to restrict the exercise of options at certaintimes in specified circumstances. The options marketsoften exercise such authority with respect to an option inwhich trading has been halted. If a restriction on exerciseis imposed at a time when trading in the option has alsobeen halted, holders of that option will be locked intotheir positions until either the exercise restriction or thetrading halt has been lifted.

The following paragraphs are inserted immediatelyfollowing the caption ‘‘Risks of Option Writers’’ onpage 62 of the Booklet:

The risks discussed in paragraphs 3, 4, 5 and 10below apply to writers of non-binary and binary options,but the risks discussed in paragraphs 1, 2, 6, 7, 8, 9 and11 are inapplicable to writers of binary options. Specialrisks of binary options are discussed below under thecaption ‘‘Special Risks of Binary Options (Other ThanCredit Default Options).’’

The risks discussed in paragraphs 5, 9 and 10below apply to writers of range options, but the risksdiscussed in paragraphs 1, 2, 6, 7, 8 and 11 do not.Although some of the risks discussed in paragraphs 3and 4 apply to writers of range options, these risks areseparately discussed below under the caption ‘‘SpecialRisks of Range Options’’ because range options are of asingle type (rather than consisting of a put class and acall class) and have a unique payout structure.

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The paragraph numbered 1 at the top of page 62 ofthe Booklet is replaced with the following paragraph:

1. An option writer may be assigned an exerciseat any time during the period the option is exercisa-ble. Starting with the day it is purchased (provided, inthe case of a delayed start option, that its exercise pricehas been set), an American-style option is subject tobeing exercised by the option holder at any time until theoption expires. This means that the option writer is sub-ject to being assigned an exercise at any time after hehas written the option until the option expires or until hehas closed out his position in a closing transaction. Bycontrast, the writer of a European-style option (includinga European-style delayed start option), a capped option,or an American-style delayed start option before its exer-cise price is set is subject to assignment only when theoption becomes exercisable or, in the case of a cappedoption, when the automatic exercise value of the underly-ing interest hits the cap price.

The paragraph numbered 3 on page 63 of the Book-let is replaced with the following paragraph:

3. The writer of an uncovered call (other than abinary call) is in an extremely risky position and mayincur large losses if the value of the underlying interestincreases above the exercise price. For the writer of anuncovered call (other than a binary call), the potentialloss is unlimited. When a physical delivery call isassigned an exercise, the writer will have to purchase theunderlying interest in order to satisfy his obligation on thecall, and his loss will be the excess of the purchase priceover the exercise price of the call reduced by the pre-mium received for writing the call. In the case of acash-settled call other than a binary call, the loss will bethe cash settlement amount reduced by the premium.Anything that may cause the price of the underlying inter-est to rise dramatically, such as a strong market rally orthe announcement of a tender offer for an underlyingstock at a price that is substantially above the prevailingmarket price, can cause larges losses for an uncoveredcall writer. For the writer of a binary call, the potential losswill be limited to the fixed cash settlement amount of theoption minus the premium received for writing the call.The writer of a binary call will be obligated to pay theentire fixed cash settlement amount if the exercise settle-ment value is only slightly in the money or, for certainbinary calls, even if the exercise settlement value is at themoney.

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The following example is inserted immediately fol-lowing the example at the bottom of page 63 of theBooklet:

EXAMPLE: An investor receives a premium of $4for writing a binary call option on XYZ security that has anexercise price of $80 and a fixed cash settlement amountof $100. If the exercise settlement value of XYZ is $81 atexpiration, the investor will incur a loss of $96 (the $100paid to the holder of the call option less the $4 premiumreceived when the option was written).

The paragraph beginning at the bottom of page 63 ofthe Booklet is replaced with the following paragraph:

The writer of an uncovered call (other than a binarycall) is in an extremely risky position and may incur largelosses. Moreover, as discussed in Chapter IX, a writer ofuncovered calls must meet applicable margin require-ments (which, except in the case of binary calls, can risesubstantially if the market moves adversely to the writer’sposition). Uncovered call writing is thus suitable only forthe knowledgeable investor who understands the risks,has sufficient liquid assets to meet applicable marginrequirements, and, except in the case of binary options,where the potential loss is limited as described above,has the financial capacity and willingness to incur poten-tially substantial losses. A binary call writer may berequired under exchange rules to deposit the full cashsettlement amount at the time the option is written.

The paragraph numbered 4 on page 64 of the Book-let is replaced with the following paragraph:

4. As with writing uncovered calls, the risk of writ-ing put options is substantial. The writer of a put optionbears a risk of loss if the value of the underlying interestdeclines below the exercise price, and such loss couldbe substantial if the decline is significant. The writer of aput bears the risk of a decline in the price of the underly-ing interest — potentially to zero in the case of a put otherthan a binary put. A writer of a physical delivery put whois assigned an exercise must purchase the underlyinginterest at the exercise price — which could be substan-tially greater than the current market price of the underly-ing interest — and a writer of a cash-settled put otherthan a binary put must pay a cash settlement amountwhich reflects the decline in the value of the underlyinginterest below the exercise price. For the writer of abinary put, the potential loss will be the fixed cash settle-ment amount of the option minus the premium receivedfor writing the put. The writer of a binary put will beobligated to pay the entire fixed cash settlement amounteven if the exercise settlement value of the option is onlyslightly in the money. Unless a put is a cash-secured put

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(discussed below), its writer is required to maintain mar-gin with his brokerage firm. Moreover, the writer’s pur-chase of the underlying interest upon being assigned anexercise of a physical delivery put may result in an addi-tional margin call.

The second full paragraph on page 64 of the Bookletis replaced with the following paragraph:

Put writers must have an understanding of the risks,the financial capacity and willingness to incur potentiallysubstantial losses, and the liquidity to meet marginrequirements and to buy the underlying interest, or topay the cash settlement amount, in the event the optionis exercised. A writer of an American-style put other thana delayed-start option can be assigned an exercise atany time during the life of the option until such time as heenters into a closing transaction with respect to theoption. A writer of an American-style delayed-start optioncan be assigned an exercise at any time after the option’sexercise price is set until such time as he enters into aclosing transaction with respect to the option. Since exer-cise will ordinarily occur only if the market price of theunderlying interest is below the exercise price of theoption, the writer of a physical delivery put option canexpect to pay more for the underlying interest upon exer-cise than its then market value.

The following example is inserted immediately fol-lowing the example at the bottom of page 64 of theBooklet:

EXAMPLE: An investor receives a premium of $4for writing a binary put option on XYZ security that has anexercise price of $80 and a fixed cash settlement amountof $100. If the exercise settlement value of XYZ is $79 atexpiration, the investor will incur a loss of $96 (the $100paid to the holder of the put option less the $4 premiumreceived when the option was written).

The first full paragraph at the top of page 65 of theBooklet is replaced with the following paragraph:

In the case of a put other than a binary put, the putwriter’s exposure to margin requirements can be elimi-nated if the put writer deposits cash equal to the option’sexercise price with his brokerage firm. Under this strat-egy, known as cash-secured put writing, the put writer isnot subject to any additional margin requirementsregardless of what happens to the market value of theunderlying interest. In the meantime, the put writer mightearn interest by having the cash invested in a short-termdebt instrument — for example, in a Treasury bill. How-ever, a cash-secured put writer is still subject to a risk ofloss if the value of the underlying interest declines. The

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risk of writers of binary puts is limited to the cash settle-ment amount of the option, and a binary put writer maybe required under exchange rules to deposit the full cashsettlement amount at the time the option is written.

The paragraph numbered 5 on page 65 of the Book-let is replaced with the following paragraph:

5. The risk of being an option writer may bereduced by the purchase of other options on the sameunderlying interest — and thereby assuming a spreadposition — or by acquiring other types of hedging posi-tions in the options markets or other markets. However,even where the writer has assumed a spread or otherhedging position, the risks may still be significant. Seeparagraph 1 under ‘‘Other Risks’’ below. The risk profileof a spread where the long and short legs are options ofdifferent types is not the same as where both legs areoptions of the same type. For example, where the shortleg is a conventional option, the risk-reducing character-istics of a long leg consisting of binary or range optionsare different than where the long leg is a conventionaloption because of the fixed cash settlement amount ofbinary options and the unique payout structure of rangeoptions.

The second full paragraph on page 68 of the Bookletis replaced with the following paragraph:

In the case of straddle writing, where the investorwrites both a put and a call on the same underlyinginterest at the same exercise price in exchange for acombined premium on the two writing transactions, thepotential risk is unlimited (except in the case of cappedoptions or binary options). Except where a straddle con-sists of binary options, to the extent that the price of theunderlying interest is either below the exercise price bymore than the combined premium, or above the exerciseprice by more than the combined premium, the writer of astraddle will incur a loss when one of the options is exer-cised. Indeed, if the writer is assigned an exercise on oneoption position in the straddle and fails to close out theother position, subsequent fluctuations in the price of theunderlying interest could cause the other option to beexercised as well, causing a loss on both writing posi-tions. An investor who writes a straddle using binaryoptions will incur a loss when the combined premium isless than the fixed cash settlement amount of the optionthat is exercised.

The second full paragraph on page 71 of the Bookletis replaced with the following paragraph:

Even if options trading is halted, holders of Ameri-can-style options, other than delayed start options forwhich an exercise price has not yet been set, would still

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be able to exercise unless exercises were restricted.(However, OCC or an options market may restrict theexercise of an option while trading in the option has beenhalted, and the restriction may remain in effect untilshortly before expiration. See paragraph 5 under ‘‘Risksof Option Holders’’ above.) If the option is exercisablewhile trading has been halted in the underlying interest,option holders may have to decide whether to exercisewithout knowing the current market value of the underly-ing interest. This risk can become especially important ifan option is close to expiration, and failure to exercise willmean that the option will expire worthless. If exercises dooccur when trading of the underlying interest is halted,the party required to deliver the underlying interest maybe unable to obtain it, which may necessitate a post-poned settlement and/or the fixing of cash settlementprices (see Chapter VIII).

The paragraph numbered 4 on page 71 of the Book-let is replaced with the following paragraph:

4. All cash-settled options have certain specialrisks. The special risks applicable to cash-settled indexoptions are discussed under ‘‘Special Risks of IndexOptions’’ below. Special risks applicable to rangeoptions are discussed under ‘‘Special Risks of RangeOptions’’ and the special risks applicable to binaryoptions are discussed under ‘‘Special Risks of BinaryOptions (Other than Credit Default Options)’’ and ‘‘Spe-cial Risks of Credit Default Options’’ below.

The following paragraph is inserted immediatelybelow the caption ‘‘Special Risks of Index Options’’ onpage 73 of the Booklet:

The risks discussed in paragraphs 4, 5, 7, 8 and 10below are generally applicable to writers of non-binaryand binary index options, but the risks discussed in para-graphs 1 through 3, 6 and 9 are inapplicable to writers ofbinary index options. The risks discussed in para-graphs 4, 5, 7, 8 and 10 below apply to writers of rangeoptions on securities indexes, but the risks discussed inparagraphs 1 through 3, 6 and 9 do not. Special risks ofrange options are discussed below under the caption‘‘Special Risks of Range Options.’’

The paragraph numbered 2 on page 73 of the Book-let is replaced with the following paragraph:

2. Even if the writer of a cash-settled index calloption could assemble a securities portfolio that exactlyreproduced the composition of the underlying index, thewriter still would not be fully covered from a risk stand-point because of the ‘‘timing risk’’ inherent in writingcash-settled options. When a cash-settled index option isexercised, the amount of cash that the holder is entitled

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to receive is determined by the difference between theexercise price and the exercise settlement value, which isbased on the prices of the constituent securities at aparticular time on or in relation to the date on which theoption is exercised. As with most other kinds of options,the writer will not learn that he has been assigned untilthe next business day, at the earliest. The time lagbetween exercise and notice of assignment poses no riskfor the writer of a covered physical delivery call, becausethat writer’s obligation is to deliver the underlying interestand not to pay its value as of a fixed time in the past. Solong as the writer of a physical delivery call already ownsthe underlying interest, he can satisfy his settlement obli-gations simply by delivering it, and the risk that its valuemay decline after the exercise date is borne by the exer-cising holder. In contrast, even if the writer of acash-settled index call holds securities that exactlymatch the composition of the underlying index, he willnot be able to satisfy his assignment obligations by deliv-ering those securities against payment of the exerciseprice. Instead, he will be required to pay cash in anamount based on the exercise settlement value on theexercise date, and by the time he learns that he has beenassigned, the index may have declined, with a corre-sponding decline in the value of the securities portfolio.This ‘‘timing risk’’ is an inherent limitation on the ability ofwriters of cash settled calls to cover their risk exposure byholding positions in the underlying interest. This riskapplies only to American-style options. The writer of aEuropean-style or capped call that is exercisable only onthe expiration date runs the risk of assignment only withrespect to exercises filed on that day. If the call is morethan marginally in the money on the preceding tradingday, the writer can ordinarily assume that it will be exer-cised and take market action to protect himself against asubsequent decline in the value of his position in theunderlying interest.

The paragraph numbered 5 on page 76 of the Book-let is replaced with the following paragraph:

5. Holders and writers of index options generallybear the risk that the reported current index level may bein error. Persons who exercise cash-settled indexoptions or are assigned exercises based on erroneouslyreported index levels will ordinarily be required to makesettlement based on the exercise settlement value asinitially reported by the official source of the index, even ifa corrected value is subsequently announced. In thecase of binary index options, while the exercise settle-ment amount is fixed, the exercise settlement value of theunderlying index will determine whether the option isautomatically exercised and returns a cash settlement

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amount or expires worthless. References herein to indexvalues ‘‘as initially reported’’ refer to the values initiallyreported by the source of the index as definitive, and notto any tentative or preliminary values that may beannounced at an earlier time subject to adjustment. Inextraordinary circumstances (e.g., where an exercisesettlement value as initially reported is obviously wrongand inconsistent with values previously reported, and acorrected value is promptly announced), OCC has dis-cretion to direct that exercise settlements be based on acorrected exercise settlement value. Ordinarily, however,the exercise settlement value as initially reported by theofficial source of the index will be conclusive for exercisesettlement purposes.

The paragraphs numbered 7 and 8 beginning onpage 77 of the Booklet are replaced with the followingparagraphs:

7. Cash-settled index options whose exercisesettlement values are based on the opening prices of theconstituent securities are not traded on the last sched-uled trading day for those securities prior to the optionexpiration date. An option holder will be able to realizevalue from his option on that day only if the option is inthe money and is exercised. A writer of this type of optionwho has not previously closed out his position will beunable to do so on that last trading day for the constitu-ent securities and will be at risk of being assigned anexercise.

8. Current index levels will ordinarily continue tobe reported even when trading is delayed or interruptedin some or all of the constituent securities of the index orwhen the reporting of transactions in those securities hasbeen delayed. In that event, the reported index levels willbe based on the most recent reported prices of the con-stituent securities — whether or not those securities arebeing currently traded. As a result, reported index levelsmay at times be based on non-current price informationwith respect to some or even all of the constituent securi-ties of an index. If this condition existed at the time ofdetermining the exercise settlement value of an exer-cised option, that exercise would be settled on the basisof an index level that might not reflect current price infor-mation with respect to constituent securities accountingfor a significant portion of the value of the index. (Indeed,as noted in Chapter IV, an exercise settlement value thatis based on the opening prices of the constituent securi-ties may not coincide with, and may diverge substantiallyfrom, the index values that are reported at the time of theopening.) Moreover, if the index underlay a capped indexoption or a binary index option, that option would orwould not be automatically exercised based on an index

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level that might not reflect the true state of the market atthe time.

The paragraph numbered 10 beginning on page 78of the Booklet is replaced with the following paragraph:

10. The purchase and sale of index options in for-eign markets at times when U.S. markets are closed maypresent special risks. Although an underlying index maybe based on securities primarily traded in U.S. markets,the index levels reported in foreign options markets atsuch times may be based on the trading of some or all ofthe constituent securities in foreign markets, and, in anycase, option premiums in the foreign market will notreflect current prices of the constituent securities in U.S.markets. In addition, if a cash-settled index option (otherthan a binary index option) is exercised through the for-eign office of a brokerage firm on a day when U.S. mar-kets are closed, the exercise settlement value of theoption will not be known until the time fixed for determin-ing exercise settlement values on the next day on whichU.S. markets are open. The corresponding risks wouldapply to the trading in U.S. markets of options based onindexes of securities primarily traded in foreign markets.

The following new paragraph is inserted on page 78of the Booklet immediately before the section in Chapter Xtitled ‘‘Special Risks of Debt Options’’:

15. Holders and writers of delayed start optionsbear the risk that the index level used to calculate theexercise price on the exercise price setting date may beunavailable or incorrect or that the options market mayincorrectly calculate the exercise price. Paragraph 5 ofthis section discusses some of the risks of an errone-ously reported index level to a person buying, selling, orexercising an option, or who is assigned an option exer-cise, based on the erroneous index level. Similarly, per-sons who are holders or writers of delayed start optionson the exercise price setting date bear the risk that anerroneously reported index level will be used to set theexercise price. There is the additional risk that a correctindex level will be used, but the options market will calcu-late the exercise price incorrectly. Once a series ofdelayed start options is opened for trading on the dayafter the exercise price setting date, even if a correctedindex level is later reported, or if it is later discovered thatan exercise price was set incorrectly, the exercise pricewill not be corrected to account for such errors.

The following new sections are inserted at the end ofChapter X of the Booklet following the section captioned

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‘‘Special Risks of Credit Default Options’’ (which wasadded in the June 2007 Supplement):

SPECIAL RISKS OF BINARY OPTIONS (OTHERTHAN CREDIT DEFAULT OPTIONS)

1. Risks of holders of binary options are similar tothe risks described above applicable to holders of othercash-settled, European-style options, but the holder of abinary option will not receive any gain in excess of thefixed settlement amount of the option. Non-binaryoptions, in contrast, may provide greater return to theholder as the difference between the exercise price andthe exercise settlement value of the underlying interestincreases. A binary option is like a capped option in thesense that its maximum return is limited. Unlike a cappedoption, however, the payout on a binary option is all ornothing. Accordingly, with respect to a binary option, theholder may experience a relatively greater gain than theholder of a non-binary option when the option is in themoney by a small amount but a relatively smaller gainwhen the option is in the money by a greater amount.

2. Binary options may be more difficult to hedge,or to use as hedges, than non-binary options. Because ofthe fixed settlement amount to be realized from a binaryoption, an investor who wishes to hedge the risk of anincrease in the price of a specified quantity of a stock, forexample, cannot create a perfect hedge by buying aspecified quantity of at-the-money binary options thatreturn a cash settlement amount if the exercise settle-ment value of the underlying security is above the currentprice of the stock. If the stock price at expiration of theoption has risen only slightly above the exercise price,the option payout may exceed the aggregate increase inthe value of the stock. If the stock price has risen sub-stantially over the exercise price, the payout from theoption may not be sufficient to cover the excess. Simi-larly, an investor who writes a binary option on an individ-ual stock and wishes to hedge the obligation throughownership of the shares of the underlying stock wouldnot be able to do so precisely through the ownership ofany specific number of shares.

3. Holders and writers of binary options may beara heightened risk that they will be adversely affected bymanipulative behavior in the markets. Because a binaryoption that is in the money by even the smallest amount(or, in the case of certain binary options, at the money)will pay the full fixed settlement amount, there may be anincentive for holders or writers of options that are at ornear the money at expiration to attempt to influence theexercise settlement value in order to cause a series ofoptions to expire either in or out of the money. Although

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opportunities for manipulation may be greater when theunderlying interest is an individual security than when it isan index, volume weighted average pricing is used todetermine the exercise settlement value of binary stockoptions in order to reduce the likelihood of such manipu-lation. While market manipulation is unlawful under thefederal securities laws and SEC regulations, there can beno assurance that manipulation affecting binary optionswill not occur. If manipulation does occur, exercise settle-ment values may be based on the manipulated price andthere may be no adequate remedy available to investors.

4. A writer of a binary option has risks similar tothose of writers of other cash-settled, European-styleoptions except that the amount that the writer will berequired to pay if assigned an exercise notice is limited tothe fixed settlement amount. Even though the potentialloss is limited, writers of binary options must have suffi-cient liquid assets to pay the fixed cash settlementamount and the financial capacity to bear that potentialloss.

5. A writer of a binary option will be obligated topay the entire fixed cash settlement amount, even if theexercise settlement value is only slightly in the money or,in the case of certain binary options, at the money. Inves-tors should be aware of the criteria for automatic exerciseof the binary options that they purchase or write. Binarystock options may be different in this regard from binaryindex options, and binary options traded on one optionsmarket may have different terms from those traded inother options markets.

6. A binary option that has an exercise price at ornear the current price or level of the underlying as theexpiration date approaches may be more volatile andtherefore involve more risk than a non-binary option.

The following new section is inserted at the end ofChapter X on page 88 of the Booklet:

SPECIAL RISKS OF RANGE OPTIONS

1. Range options have a unique payout structure.Whereas other cash-settled options (other than binaryoptions) provide an increasingly greater return to theoption holder as the difference between the exerciseprice and the level of the underlying interest increases, arange option’s potential payout increases through thelower range until it reaches the maximum cash settle-ment amount, remains at the maximum cash settlementamount through the entire middle range, and thendecreases to zero as the level of the underlying interestmoves through the high range. Therefore, a range optionholder must not only be right about the timing of an

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anticipated change in the level of the underlying index,but he must also be right about the degree of the changebecause the option will have a reduced payout or dropout of the money altogether if the underlying indexmoves too far in either direction. In that case, a rangeoption holder may lose all or a significant part of hisinvestment in the option. On the other hand, the directionin which the underlying index moves will not affect thepayout for a range option as long as it stays within themiddle range.

2. The writer of a range option, like writers ofother cash-settled options, runs the risk that the optionwill expire in the money and he will be required to pay thecash settlement amount. The writer’s potential loss islimited to the maximum cash settlement amount of theoption minus the premium received. Actual loss willdepend on where the level of the underlying index fallswithin the range length.

EXAMPLE: An investor receives a premium of$10 for writing a range option on XYZ index that has amaximum cash settlement amount of $100. Assume thatthe option has a low range from 90 to 100, middle rangefrom 100 to 110, and a high range from 110 to 120. If thelevel of the XYZ index at expiration is 100 (i.e., falls in themiddle range), the investor will incur a loss of $90 (the$100 paid to the holder of the option less the $10 pre-mium received when the option was written). If the levelof the XYZ index at expiration is in the low range or thehigh range, the profit or loss incurred by the investor willdepend on where along the low range or high range theindex level falls at expiration.

3. Range options may be more difficult to hedge,or to use as a hedge, than other types of options becauseof range options’ unique payout structure. A rangeoption would be a perfect hedge only for a risk exposureto the underlying interest that varies with the level of theunderlying interest in the same unique way as the payoutstructure of the range option. In addition, as in the case ofa binary option, it is not possible to precisely offset therisk of writing a range option through ownership of theunderlying interest.

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DECEMBER 2009SUPPLEMENT

The February 1994 version of the booklet entitledCharacteristics and Risks of Standardized Options (the‘‘Booklet’’) is amended as provided below. Part I of thisSupplement contains information regarding options onindexes measuring (i) the historical (‘‘realized’’) varianceor the predicted (‘‘implied’’) or realized volatility of thedaily returns of a stock index; (ii) the return from a tradingstrategy involving purchases and sales of equity securi-ties and options on those securities; or (iii) the dividendson the component stocks of a dividend index. Part II ofthis Supplement contains information relating to theadjustment of stock option contracts to reflect cash divi-dends or distributions on the underlying securities. ThisSupplement supersedes and replaces the September2008 Supplement to the Booklet.

Part I. Variability Options.

1. The first full paragraph on page 2, as amended inPart III of the May 2007 Supplement, is further amended toread as follows:

Each options market selects the underlying inter-ests on which options are traded on that market. Optionsare currently available covering four types of underlyinginterests: equity securities (which term includes ‘‘fundshares’’ described in Chapter III), indexes (includingstock, variability, strategy-based and dividend indexes),government debt securities, and foreign currencies.Options on other types of underlying interests maybecome available in the future.

2. The second paragraph on page 7, as amended bythe June 2008 Supplement, is replaced with the followingparagraph:

Exercise prices for each options series (except forseries of delayed start options) are established by theoptions market on which that series is traded at the timetrading in the series is introduced, and are generally setat levels above and below the then market value of theunderlying interest. However, the options markets mayuse other methods to set exercise prices. Specific infor-mation regarding the setting of exercise prices may beobtained from the listing options market. The optionsmarkets generally have the authority to introduce addi-

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tional series of options with different exercise pricesbased on changes in the value of the underlying interest,or in response to investor interest, or in unusual marketconditions, or in other circumstances. For series ofdelayed start options, exercise price setting formulas —rather than exercise prices — are established by theoptions market on which each series is traded before thetime trading commences in each such series. Thoseexercise price setting formulas provide that on the exer-cise price setting date the exercise price for the series willbe fixed at the money, in the money by a certain amount,or out of the money by a certain amount.

3. The first two paragraphs on page 23, under the cap-tion ‘‘About Indexes,’’ are replaced with the followingthree paragraphs and new caption:

As referred to in this booklet, an index is a measureof the prices or other attributes of a group of securities*or other interests. Although indexes have been devel-oped to cover a variety of interests, such as stocks andother equity securities, debt securities and foreign cur-rencies, and even to measure the cost of living, the fol-lowing discussion relates only to (i) indexes on equitysecurities (which are called stock indexes in this book-let), (ii) indexes intended to measure the implied volatility,or the realized variance or volatility, of specified stockindexes (which are collectively called variability indexesin this booklet), (iii) strategy-based indexes, such asindexes measuring the return of a particular strategyinvolving the component securities of a stock index andoptions on that index, (iv) indexes intended to measurethe stock price changes of the component securities ofunderlying indexes that result solely from the distributionof ordinary cash dividends, as calculated on their respec-tive ex-dividend dates (which are called dividend indexesin this booklet), and (v) options on the above indexes(including binary index options and range options).

Stock indexes are compiled and published by vari-ous sources, including securities markets. A stock indexmay be designed to be representative of the stock mar-ket of a particular nation as a whole, of securities tradedin a particular market, of a broad market sector (e.g.,industrials), or of a particular industry (e.g., electronics).A stock index may be based on securities traded primar-ily in U.S. markets, securities traded primarily in a foreignmarket, or a combination of securities whose primary

* Some indexes reflect values of companies, rather thansecurities, by taking into account both the prices ofcomponent securities and the number of those securi-ties outstanding.

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markets are in various countries. A stock index may bebased on the prices of all, or only a sample, of the securi-ties whose prices it is intended to represent. Like stockindexes, variability indexes, strategy-based indexes, anddividend indexes are securities indexes. However, varia-bility indexes may measure the implied volatility of anindex, using the premiums for series of options on thatindex, or may measure the historical variance or volatilityof the returns of an index using daily returns over a cer-tain period assuming a mean daily return of zero. Strat-egy-based indexes measure the return of a particularstrategy involving the component securities of an indexand options on that index. Dividend indexes measure thestock price changes of the component securities ofunderlying indexes that result solely from the distributionof ordinary cash dividends, as calculated on their respec-tive ex-dividend dates. In this booklet options on variabil-ity indexes are referred to generically as variabilityoptions, options on strategy-based indexes are referredto as strategy-based index options, and options on divi-dend indexes are referred to as dividend index options.

Information relating specifically to stock indexes,variability indexes, strategy-based indexes and dividendindexes appears below under the captions ‘‘StockIndexes,’’ ‘‘Variability Indexes,’’ ‘‘Strategy-basedIndexes’’ and ‘‘Dividend Indexes,’’ respectively.

STOCK INDEXES

4. The first sentence in the second full paragraph onpage 25 is amended as follows:

Investors should keep in mind that a stock index canrespond only to reported price movements in its compo-nent securities.

5. The paragraph that was inserted following the thirdfull paragraph on page 26 in the December 1997 Supple-ment to this booklet is relocated so that it follows thesecond full paragraph on page 25 (since that paragraphrelates to stock indexes and not to variability indexes orstrategy-based indexes).

6. The following paragraphs and captions are added onpage 25 following the relocated paragraph referred to inpoint 3 immediately above:

DIVIDEND INDEXES

Dividend indexes measure the stock price changesof the component securities of underlying indexes thatresult solely from the distribution of ordinary cash divi-dends, as calculated on their respective ex-dividend

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dates. As of the date of this Supplement, dividendindexes on which options are approved to be traded arebased on the accumulated ‘‘ex-dividend amounts’’reflecting ordinary cash dividends for the componentsecurities over a specified accrual period. Investorsshould note that determinations by the reporting author-ity for a dividend index as to whether a cash dividend is‘‘ordinary’’ and therefore reflected in the index may bemade using rules other than those relating to adjust-ments of stock options and described in Chapter IIIunder ‘‘Features of Stock Options.’’ At the end of eachaccrual period, the value of a dividend index is reset tozero. The values of dividend indexes are typically pub-lished once per trading day, and these values could beaffected by an issuer’s determination to pay stock divi-dends in lieu of cash dividends or to forego payment ofcash dividends. An ‘‘ex-dividend amount’’ is the amountby which the market price of a stock decreases on theex-dividend date to reflect the dividend that will bereceived by holders of the stock immediately prior to theex-dividend date. The ‘‘ex-dividend amount’’ is calcu-lated by the reporting authority for the index, and infor-mation as to the method of calculation is available fromthe listing options market. Investors must understand themethod used to calculate dividend indexes in order tounderstand the relationship between current dividendindex values and the prices of dividend index options.

VARIABILITY INDEXES

Variability indexes, and investment strategies involv-ing the use of variability options, are inherently complex.You should be certain that you understand the method ofcalculation and significance of any variability index andthe uses for which variability options based on that indexare suited before buying or selling the options.

Economic, political, social and other events affect-ing the level of the reference index may also affect thevariability of the reference index. Variability indexesbased on equity securities have historically tended tomove inversely to their reference indexes, since variabil-ity, whether in the form of variance or volatility, tends to beassociated with turmoil in the stock markets and turmoiltends to be associated with downward moves in thestock market. But this relationship does not always holdtrue and, indeed, a variability index may be rising at atime when its reference index is also rising.

As with other index options, a call variability optionwill be in the money at exercise if the exercise settlementvalue of the underlying index is above the exercise priceof the option, and a put variability option will be in themoney at exercise if the exercise settlement value of the

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underlying index is below the exercise price of the option.Whether the variability option is in the money is deter-mined in relation only to the value of the underlying varia-bility index, and not in relation to the reference index.

The information set forth on pages 26 through 28 ofthe Booklet under the caption ‘‘Features of IndexOptions’’ is generally applicable to variability options.However, the method of determining the exercise settle-ment value for certain variability options may differ fromthose for other index options, and you should read theinformation below relating to the particular types of varia-bility options you wish to trade. Note also that variabilityoptions may have expiration dates that are different fromthose of other index options. You should be sure that youknow the expiration date for each variability option youwish to buy or write.

As of the date of this Supplement, options areapproved for trading on three different types of variabilityindexes representing three different ways of measuringvariability. A realized variance index represents the varia-bility of returns of a specified reference index over aspecified time period relative to an average (mean) dailyreturn of zero. The realized volatility of the same indexover the same time period, also referred to as the stan-dard deviation, is equal to the square root of the realizedvariance. Both of these measures are calculated fromactual historical index values over the relevant period oftime. An implied volatility index is a measure of the pre-dicted future variability of the reference index over aspecified future time period. It measures the predictedstandard deviation of the daily returns of the referenceindex measured over the specified future time period. Animplied volatility index reflects predictions about thefuture volatility of the reference index as those predic-tions are implied by reported current premium values foroptions on the reference index. The realized volatility ofthe reference index may not conform to thosepredictions.

There are various methods of estimating impliedvolatility, and different methods may provide differentestimates. Under the method that is used for volatilityoptions that are traded at the date of this Supplement,implied volatility index values are calculated using pre-mium values of out-of-the-money series of options on thereference index in expiration months that are selectedand weighted to yield a measure of the volatility of thereference index over a specified future time period. Forexample, an implied volatility index that is calculatedusing this method and that is designed to provide a pre-diction of volatility over 30 calendar days is based onpremium values of out-of-the-money options series on

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the reference index expiring in the two nearest monthswith at least 8 calendar days left to expiration. Impliedvolatility index values will be affected by any factor thataffects the component options series of the index, includ-ing, among other things, applicable laws, regulationsand trading rules, the market-making and order process-ing systems of the markets on which the options aretraded, and the liquidity and efficiency of those markets.

Implied volatility options that are described in thisSupplement are European-style and ‘‘A.M.-settled,’’which means that the exercise settlement values arederived from opening values of the component put andcall options. An exercise settlement value for implied vol-atility options is calculated from actual opening premiumprices of the relevant series of options on the referenceindex unless there is no trade in a series at the opening,in which case the mid-point of the bid and offer premiumquotations for that series as determined at the opening oftrading is used. All other index values for each of theseimplied volatility indexes are calculated using the mid-points of the bid and offer premium quotations of theoptions series that comprise the index. (Since theseindex values are based on quotations they are some-times referred to as ‘‘indicative values.’’)

Because different values may be used in calculatingthe indicative values and exercise settlement values forimplied volatility options, there is a risk that there may bea divergence between the exercise settlement value forimplied volatility options and an indicative value calcu-lated at the opening on the date on which the exercisesettlement value is being determined. This risk isdescribed further in Chapter X of this booklet, under theheading ‘‘Special Risks of Index Options.’’ Additionalinformation regarding the method used to calculate thevalues of a particular implied volatility index is availablefrom the market on which options on that index aretraded.

Investors should keep in mind that indicative valuesof an implied volatility index can reflect changes in theimplied volatility of the reference index only to the extentthat quotations of the component options of the index arecurrent. Indicative values for an implied volatility indexmay be disseminated, and implied volatility options maybe traded, during times when one or more componentsecurities in the reference index are not trading, or whenthe quotations for one or more of the options series com-prising the implied volatility index are not current. Simi-larly, an exercise settlement value for an implied volatilityindex may be calculated even if one or more componentsecurities in the reference index are not trading. In any ofthese cases, an indicative value or exercise settlement

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value will be based on non-current information. The qual-ity of the information reflected in the values of an impliedvolatility index should be evaluated in light of the depthand liquidity of the markets for the securities in the refer-ence index and the options that are the components ofthe index.

The realized variability indexes underlying variabilityoptions approved for trading as of the date of this Sup-plement measure the actual volatility or variance, as thecase may be, of the reference index for a fixed periodending on the last trading day before the expiration datefor the variability option. As of the date of this Supple-ment indicative values for a realized variability index arepublished once per trading day during the fixed period,but values published early in the period, which are basedon a small number of observations, may vary substan-tially from the exercise settlement value. The exercisesettlement amount for a realized variability option isequal to the difference between the exercise settlementvalue and the exercise price of the option, times amultiplier.

Realized variability options that are described in thisSupplement are European-style and ‘‘A.M.-settled.’’ Theinitial and final values of a reference index for purposes ofcalculating the exercise settlement value for realized vari-ability options described in this Supplement are ordina-rily calculated from the actual opening prices of the com-ponent securities of the reference index in their primarymarket. If a component security does not open for trad-ing, the last reported price in the primary market may beused. OCC’s rules provide for other methods of deter-mining the exercise settlement value of a reference indexin extraordinary circumstances. All other values for real-ized variability indexes are calculated from the publishedclosing value of the reference index.

STRATEGY-BASED INDEXES

Strategy-based indexes are complex, and their cal-culations may involve the use of multiple variables,including the values of equity securities and options onthose securities. Strategies based on options on theseindexes, referred to as ‘‘strategy-based index options,’’are also complex. Investors should be certain that theyunderstand the method of calculation and significance ofany strategy-based index and the uses for whichstrategy-based index options are suited before buying orselling the options.

Strategy-based indexes measure the returns frominvestment strategies involving the purchase and sale ofvarious securities. All of the securities purchased and

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sold pursuant to the strategy are deemed to be the com-ponent securities of the strategy-based index. As of thedate of this Supplement, the only strategy-based indexon which options are approved to be traded is a buy-write index measuring the return on a hypothetical ‘‘buy-write’’ strategy involving the simultaneous writing of calloptions on a stock index and purchase of the componentsecurities of that index. Under the hypothetical strategy, asuccession of at the money index call options with onemonth to expiration are assumed to be written, and theproceeds (i.e., the premiums received) from writing theoptions are assumed to be invested in a weighted basketof the component securities that mirrors the index. Divi-dends received from ownership of the component secu-rities of the index are similarly assumed to be reinvestedin the basket of securities. The options are deemed helduntil expiration, and new call options are assumed to bewritten on the business day immediately after the settle-ment value is determined. All options written under thebuy-write strategy are deemed to have been assigned anexercise notice on the expiration date if in the money onthat date, and to have expired without value if out of themoney on the expiration date. The buy-write index mea-sures the cumulative gross rate of return of the strategysince the inception of the index. The index will thereforerise during periods when the strategy is profitable anddecline when it is unprofitable. The following exampleillustrates the calculation of the buy-write index.

EXAMPLE: Assume that the buy-write index hasa value of 800 on January 1. The return from the buy-writestrategy, taking into account the returns of the compo-nent securities of the stock index and of the optionsassumed to be written on the index, is .5% and 1% onJanuary 2 and 3, respectively. The index value at the endof a given trading day is equal to the previous closingvalue of the index multiplied by one plus the rate of returnfor that trading day. In this example, the value of the buy-write index at the close of trading on January 3 would be812.04 (800 � 1.005 � 1.01). Assume that the return ofthe buy-write strategy on January 4, again taking intoaccount the returns of the component securities of thestock index and of the options assumed written on thatindex, is a negative .7%. The value of the buy-write indexat the close of trading on January 4 would be 806.36(812.04 � .993).

The calculation of the buy-write index, as in the caseof any strategy-based index, requires the making ofassumptions about, for example, the timing of transac-tions involved with a particular strategy and the pricesreceived or paid for the securities traded (which are

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determined using market data for specified time peri-ods). The index is calculated throughout the trading dayusing reported values for the reference index andreported premium values for the options as well as thevalue of any ordinary dividends payable on the compo-nent securities. The calculation of the index assumes thattransactions can be continuously executed, i.e., thatthere will be no market disruptions, and may useassumed prices equal to volume-weighted averageprices, which may not be the same as the prices aninvestor employing the strategy would pay or receive.Detailed information regarding calculation of the buy-write index is available from the exchange on which theoptions are traded. A special opening value for the refer-ence index is used in calculating the index on the datethat a new option is written to replace an expiring option,which is known as a roll date, and special procedures areused on roll dates to reflect the hypothetical transactionsthat are assumed to take place on those dates.

STOCK INDEXES, VARIABILITY INDEXES,STRATEGY-BASED INDEXES AND DIVIDENDINDEXES

7. The first sentence of the third full paragraph onpage 26 of the Booklet is replaced with the following:

With some exceptions, such as those noted abovewith regard to mutual fund indexes, certain foreign stockindexes, realized variance and realized volatility indexes,and dividend indexes, the values of indexes are ordinarilyupdated throughout the trading day.

8. The last sentence of the third full paragraph onpage 26 of the Booklet is replaced with the following:

Information regarding the method of calculation ofany index on which options are traded, including infor-mation concerning the standards used in adjusting theindex, adding or deleting securities, and making similarchanges, and on any modification of the index in deter-mining the underlying value for the options, is generallyavailable from the options market where the options aretraded.

9. The following paragraph is inserted before the firstfull paragraph on page 27, as amended by the June 2008Supplement:

The underlying interest for an index option may be afraction or multiple of a particular index. An option on afraction or multiple of a particular index is equivalent to anoption on the full value of the index, but with a differentcontract size. Investors in index options should be awarethat the underlying interest for an index option may not

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be the full value of a published index with which they arefamiliar.

10. The last paragraph on page 27 is replaced with thefollowing paragraph:

The exercise settlement values of index options aredetermined by their reporting authorities in a variety ofways. The exercise settlement values of some indexoptions are based on the reported level of the underlyingindex derived from the last reported prices of the compo-nent securities of the index at the closing on the day ofexercise. The exercise settlement values of other optionsare based on the reported level of the index derived fromthe opening prices of the component securities on theday of exercise. If an option is exercised on a day that isnot scheduled as a trading day for the component securi-ties of the index, the exercise settlement value is basedon the reported level of the index derived from the open-ing or closing prices (depending on the options series) ofthe component securities on the last prior day that isscheduled as a trading day. If a particular componentsecurity does not open for trading on the day the exer-cise settlement value is determined, a substitute value,such as the last reported price of that security, is used.Other means for determining the exercise settlement val-ues of some index options series have been, and maycontinue to be, established. For example, the exercisesettlement values for options on an index of foreign secu-rities may be fixed in relation to a value fixed by a foreignexchange.

11. The second paragraph on page 28 is deleted.

12. The following paragraph is inserted on page 73,immediately following the caption ‘‘Special Risks of IndexOptions,’’ and immediately before the paragraph insertedat that location by the June 2008 Supplement to thisbooklet:

The risks described in paragraphs 1 through 10 onpages 73 through 78 of this booklet relate primarily tooptions on stock indexes. The risks described in para-graph 11 relate to options on implied volatility indexes.Risks described in paragraphs 12 through 14 relate tooptions on variability indexes or strategy-based indexes.The risks described in paragraph 15 relate to delayedstart options, and the risk described in paragraph 16relates to dividend index options.

13. The following paragraphs are inserted on page 78immediately following paragraph number 10, asamended by the June 2008 Supplement:

11. Because different values may be used in calcu-lating indicative values and exercise settlement values of

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the volatility indexes underlying implied volatility options,there is a risk that there may be a divergence betweenthe exercise settlement value and an indicative value cal-culated at the opening on the date on which the exercisesettlement value is being determined. (Please refer to thediscussion in Chapter IV under the heading ‘‘VariabilityIndexes’’ for the definition of the term indicative value anda description of the method that is used to calculate anexercise settlement value for implied volatility options.) Itis to be expected that there will be at least some diver-gence between the exercise settlement value for expiringimplied volatility options and an indicative value calcu-lated at the opening on the same date because the open-ing price for each of the options series that is used tocalculate the exercise settlement value will typically be ateither the bid or the ask quotation, depending on theforces of supply and demand for that series, and not atthe mid-point between the bid and ask quotations. Thisdivergence may represent a significant percentage of theindicative value for the implied volatility index if the forcesof supply and demand cause all or most of the series toopen on the same side of the market.

12. Strategies involving the purchase and sale ofoptions on a variability index or strategy-based index areinherently complex and require a thorough understand-ing of the concepts that are measured by these indexes.Investors must understand the method used to calculatethe index in order to understand how conditions in themarket for the component securities used to calculate itsvalue may affect the value of the index. Investors may failto realize their investment objective even if they havecorrectly predicted certain events if they do not under-stand how those events may or may not affect the level ofthe index. The component securities of an implied volatil-ity index are put and call options (not stocks, which arethe component securities of stock indexes). A realizedvariability index, on the other hand, measures the actualvolatility of an index and is calculated directly from thevalues of the reference index. There is no assurance thatpredicted volatility as measured by a particular impliedvolatility index will correspond to the actual volatility ofthe reference index or to measures of predicted volatilitycalculated using other methods. A strategy-based indexmay be calculated from the prices of multiple componentsecurities of different types, such as in the case of a buy-write index measuring the return of a strategy thatinvolves transactions in stocks and options. The returnfrom a particular strategy as measured by a strategy-based index may differ from the actual returns that aninvestor following that strategy achieves, because ofassumptions regarding transactions and the failure to

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take into account significant factors such as taxes andtransaction costs.

13. Persons who exercise variability options orstrategy-based index options or are assigned exercisesbased on an erroneous index level will ordinarily berequired to make settlement based on the exercise set-tlement value as initially reported by the designatedreporting authority for the index, even if a corrected valueis subsequently announced. In extraordinary circum-stances (e.g., where an exercise settlement value as ini-tially reported is obviously wrong, and a corrected valueis promptly announced), OCC has discretion to directthat exercise settlements be based on a corrected exer-cise settlement value. Ordinarily, however, the exercisesettlement value as initially reported by the designatedreporting authority for the underlying variability index willbe conclusive for exercise settlement purposes. Asdescribed in paragraph 8. on page 77 with respect toother indexes, reported levels of a variability or strategy-based index may be based on non-current information.This may occur as a result of delays or interruptions in themarket for the component securities of the underlyingindex or the reference index (which are the same in thecase of realized variability indexes).

14. As in the case of writers of other index options,writers of variability or strategy-based index options can-not provide in advance for their potential settlement obli-gations by acquiring the underlying interest. Offsettingthe risk of writing a variability option or strategy-basedindex option may be even more difficult than offsettingthe risk of writing other index options. Even where someoffsetting of risk is possible, there are timing risks andother risks analogous to those discussed in para-graphs 3 and 4 on pages 74 and 75 of the booklet when-ever an investor attempts to employ strategies involvingtransactions in variability or strategy-based index optionsand transactions in stocks or in options, futures contractsor other investments related to stocks.

14. The following paragraph is inserted on page 78immediately following paragraph number 15, as added bythe June 2008 Supplement:

16. The reported values of dividend indexes maybe affected by factors other than the financial ability ofthe issuers of the component securities of a dividendindex to pay cash dividends. For example, an issuer’sdetermination to pay stock dividends in lieu of cash divi-dends or to forego payment of cash dividends notwith-standing its ability to do so may affect the level of adividend index.

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Part II. Definition of Ordinary Cash Divi-dend. The following replaces Part I of the May 2007Supplement:

The fourth paragraph on page 19 of the Booklet isamended to read as follows:

As a general rule, no adjustment is made for ordi-nary cash dividends or cash distributions. A cash divi-dend or distribution announced prior to February 1,2009, will generally be considered ‘‘ordinary’’ unless itexceeds 10% of the aggregate market value of the under-lying security outstanding as of the close of trading onthe declaration date. The same rule will continue to applyon and after that date with respect to options series des-ignated by OCC as ‘‘grandfathered’’ for purposes of thisrule (i.e., series opened prior to publication of the May2007 Supplement that remain outstanding on Febru-ary 1, 2009). In the case of all other options series, a cashdividend or distribution announced on or after Febru-ary 1, 2009, will generally be considered ‘‘ordinary,’’regardless of size, if OCC believes that it was declaredpursuant to a policy or practice of paying such dividendsor distributions on a quarterly or other regular basis. Noadjustment will normally be made for any cash dividendor distribution that amounts to less than $12.50 per con-tract. If an option contract has been previously adjustedto cover more shares than a standard-size option con-tract (i.e., a contract covering 100 shares or any othernumber of shares specified as the standard size for acontract prior to any adjustments) and if a correspondingstandard-size option contract also exists, the previouslyadjusted option contract will be adjusted only if the corre-sponding standard-size option contract is also adjusted.As an exception to the general rule, options on fundshares will generally be adjusted for capital gains distri-butions even if made on a regular basis, and adjustmentsmay be made for certain other distributions in respect offund shares in special circumstances described in OCC’srules, provided in each case that the amount of theadjustment would be $.125 or more per fund share.Determinations whether to adjust for cash dividends ordistributions not covered by the preceding rules, or whenother special circumstances apply, are made on a case-by-case basis.

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MAY 2010SUPPLEMENT

The February 1994 version of the booklet entitledCharacteristics and Risks of Standardized Options (the‘‘Booklet’’) is amended as provided below toaccommodate the introduction of options on index-linkedsecurities.

1. The first full paragraph on page 2 of the Booklet, aspreviously amended in the May 2007 and September2008 Supplements, is replaced by the following:

Each options market selects the underlying interestson which options are traded on that market. Options arecurrently available covering four types of underlyinginterests: equity securities (which term includes ‘‘fundshares’’ described in Chapter III), indexes (includingstock, variability, strategy-based and dividend indexes),debt securities and credit events, and foreign currencies.Options on other types of underlying interests maybecome available in the future.

2. The first three paragraphs in Chapter V appearing onpage 29 of the Booklet, as amended by the June 2007Supplement, are replaced by the following fourparagraphs:

Three kinds of debt options have been approved fortrading at the date of this booklet. Two of these kinds aresometimes referred to as price-based options. Price-based options are options which give their holders theright either to purchase or sell a specified underlying debtsecurity or to receive a cash settlement payment basedon the value of an underlying debt security (dependingon whether the options are physical delivery orcash-settled options). Options on securities issued bythe U.S. Treasury are one kind of price-based debtoptions. Options on index-linked securities are a secondkind of price-based debt options. An ‘‘index-linkedsecurity’’ is a debt security that trades on one or moreexchanges similarly to an equity security, and thatprovides a cash return to its owner based on the

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performance of a ‘‘reference asset’’ which may, forexample, consist of a securities or commodities index, afutures index, a physical commodity, a foreign currency,another debt security, or some combination of the above.The term ‘‘index’’ in the context of an index-linkedsecurity has a broader meaning than that set forth inChapter IV since, in the context of an index-linkedsecurity, the term is a synonym for the term ‘‘referenceasset’’ and is not limited to securities indexes.

A third kind of debt options, called yield-basedoptions, are options that are cash-settled based on thedifference between the exercise price and the value of anunderlying yield. At the date of this booklet, all yield-based options that have been approved for trading arebased on the yields of U.S. Treasury securities. Thedistinctions between price-based and yield-basedoptions are fundamental and should be understood byreaders interested in investing in debt options.

A fourth kind of options, called credit default options,are also described in this Chapter. Credit default optionsare cash-settled options that are related to thecreditworthiness of issuers or guarantors of debtsecurities, and are exercised upon confirmation of acredit event affecting an underlying debt security orsecurities.

The principal risks of holders and writers of debtoptions and credit default options are discussed inChapter X. Readers interested in buying or writing debtoptions or credit default options should not only read thischapter but should also carefully read Chapter X,particularly the discussions under the headings ‘‘Risks ofOption Holders,’’ ‘‘Risks of Option Writers,’’ ‘‘OtherRisks,’’ ‘‘Special Risks of Debt Options,’’ and ‘‘SpecialRisks of Credit Default Options.’’

3. The first paragraph on page 31, immediatelyfollowing the heading ‘‘Treasury Securities,’’ is replacedby the following:

The underlying debt securities of one kind of price-based options that have been approved for trading at thedate of this booklet, and the debt securities from whichthe underlying yields of yield-based options are derived,are Treasury securities — e.g., 30-year Treasury bonds,10-year Treasury notes, 5-year Treasury notes andTreasury bills.

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4. The following section is inserted immediately afterthe last paragraph on page 34 of the Booklet prior to theparagraphs inserted by the June 2007 Supplement:

OPTIONS ON CONVENTIONAL INDEX-LINKEDSECURITIES

Index-linked securities are debt securities that tradeon exchanges similarly to equity securities. Index-linkedsecurities are issued by financial institutions such asbanks and may take the form of trust certificates, units orsome other interest. An index-linked security providesowners with a cash return based on the performance of a‘‘reference asset’’ which may, for example, consist of asecurities or commodities index, a futures index, aphysical commodity, a foreign currency, another debtsecurity, or some combination of the above. Referencesin this booklet to ‘‘units’’ of underlying index-linkedsecurities include these various forms of interests. Theterm ‘‘index’’ in the context of an index-linked securityhas a broader meaning than that set forth in Chapter IVbecause, in the context of an index-linked security, theterm is a synonym for the term ‘‘reference asset’’ and isnot limited to securities indexes. As of the date of thisSupplement, options are approved to be traded onconventional index-linked securities, but not onleveraged or inverse index-linked securities.

As a general rule, a single index-linked securityoption covers 100 units of the underlying security.However, it is possible that the number of underlyingunits covered by an index-linked security option wouldbe adjusted after the option is issued if an adjustmentpanel determines, as described below, that it isappropriate to make such an adjustment.

The exercise prices of options on index-linkedsecurities that are approved for trading at the date of thisbooklet are stated in U.S. dollars per unit. As with a stockoption, the exercise price of an index-linked securityoption must be multiplied by the number of unitsunderlying the option in order to determine theaggregate exercise price and aggregate premium of theoption.

Index-linked securities generally have a term of atleast one year but not greater than thirty years. Index-linked securities may be redeemable at certain intervalsat the option of the holder through the issuer at a pricerelated to the applicable underlying reference asset,

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subject to a minimum redemption increment and otherconditions. Redemption of index-linked securities mayaffect the market for the securities by reducing thequantity of securities available for trading. Index-linkedsecurities may return less than the principal originallyinvested, regardless of the solvency of the issuer of thesecurities.

An adjustment may be made to certain of thestandardized terms of outstanding options on index-linked securities if a particular event occurs that isdetermined by an adjustment panel to warrant theadjustment. As in the case of stock options, anadjustment panel for options on index-linked securitieswould be composed of representatives of one or moreU.S. options markets and a representative of OCC, asdescribed above in Chapter II.

As a general rule, if the issuer of a particular index-linked security calls the entire issue of the security, theevent will be treated like an event in which an underlyingequity security is converted into the right to receive afixed amount of cash. If an event is treated in this manner,when the issue of index-linked securities is called,outstanding options on that issue will be adjusted torequire the delivery upon exercise of a fixed amount ofcash, and trading in the options will ordinarily cease. As aresult, after such an adjustment is made all options onthat security that are not in the money will becomeworthless and all that are in the money will have no timevalue. The expiration date of the options will ordinarily beaccelerated to fall on or shortly after the date on whichthe underlying security is called. Holders of anin-the-money option whose expiration date isaccelerated must be prepared to exercise that optionprior to the accelerated exercise cut-off time in order toprevent the option from expiring unexercised. See thediscussion in Chapter VIII under ‘‘How to Exercise.’’Writers of options whose expiration date is subject tobeing accelerated bear the risk that, in the event of suchan acceleration, they may be assigned an exercise noticeand be required to perform their obligations as writersprior to the original expiration date. When the expirationdate of an option is accelerated, no adjustment will bemade to compensate for the accelerated expiration date.As with a stock option whose underlying security isconverted into a right to receive a fixed amount of cash,

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there is no assurance that the exercise settlement datefor an accelerated index-linked security option willcoincide with the date on which the cash payment to theholders of the underlying security becomes availablefrom the issuer. Covered writers of an accelerated optionmay therefore be required to pay the cash amount inrespect of the option before they receive the cashpayment on the underlying security.

In contrast to a situation in which the issuer calls anentire issue of index-linked securities, as a general ruleno adjustment will be made to the terms of options onindex-linked securities in the event of a call of less than anentire issue of the securities. In addition, as a generalrule, no adjustment will be made to the terms of optionson index-linked securities for any interest payment on thesecurities.

As is the case with equity options, an adjustmentpanel with respect to options on index-linked securitieshas discretion to make exceptions to the general rulesdescribed above.

5. The following paragraph is inserted near the top ofpage 58 of the Booklet, after the paragraph inserted bythe June 2008 Supplement and immediately before thecaption ‘‘Risks of Option Holders’’:

The value of an option is affected by the value of theunderlying interest. It is beyond the scope of this bookletto discuss the characteristics or risks of underlyinginterests. If a description or risk factor is mentioned in thisbooklet with respect to a particular class of underlyinginterest, you should not assume that the samestatements will be made with respect to all underlyinginterests discussed herein to which they may beapplicable. You should look to disclosures made byissuers of underlying securities or information providedby publishers of underlying indexes and to informationavailable from your broker or other sources to determinethe nature and risks of the interests underlying theoptions that you trade. Some underlying interests maythemselves involve a high degree of risk. Where the valueof an underlying security is based in whole or in part onthe performance of an index, information provided by thepublisher of the referenced index, as well as financial andother disclosures made by the issuer of the underlyingsecurity regarding the issuer’s ability to perform itsobligations, may be relevant.

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6. The following paragraph is inserted on page 78 of theBooklet, immediately following the caption ‘‘Special Risksof Debt Options’’:

The risks described in paragraphs 1 through 9 of thissection relate to debt options other than options onindex-linked securities. The risks described inparagraphs 10 and 11 relate exclusively to options onindex-linked securities.

7. The following new paragraphs are inserted onpage 82 of the Booklet immediately before the section inChapter X titled ‘‘Special Risks of Foreign CurrencyOptions’’:

10. In the event of a shortage of index-linkedsecurities that are deliverable on exercise of a physicaldelivery option, OCC may impose special exercisesettlement procedures similar to those applicable tostock options, including the fixing of a cash settlementprice payable by writers who would otherwise be unableto meet their delivery obligations (see the discussion inChapter VIII under ‘‘Settlement’’), and/or prohibit theexercise of puts by holders who would be unable to meetthe resulting settlement obligations (see paragraph 5under ‘‘Risks of Option Holders’’ above).

11. In the event that an issuer of an index-linkedsecurity calls the entire issue of the security, outstandingoptions on that issue will be adjusted to require deliveryupon exercise of a fixed amount of cash. After such anadjustment, all options on that security that are not in themoney will become worthless, and all that are in themoney will have no time value. Holders must be preparedto exercise the option to prevent the option from expiringunexercised, and writers must be prepared to performtheir obligations prior to the accelerated exercise cut-offdate. There is no assurance that the exercise settlementdate for an index-linked security option will coincide withthe date on which the cash payment to the holders of theunderlying security becomes available from the issuer,and covered writers of an accelerated option thereforemay be required to pay the cash amount in respect of theoption before they receive cash payment on theunderlying security.

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sources which report the occurrence of a credit event do notmake this information publicly available until after theexpiration date. In this case, the cash settlement value of acredit default option would be zero. There is also a risk that JANUARY 2011the listing options market may determine that a credit eventhas occurred based on information available to it when in SUPPLEMENTfact no credit event has occurred. This could happen, forexample, if the sources used to confirm the credit event areerroneous. The rules of OCC and/or the listing options The February 1994 version of the booklet entitledmarket may provide that a confirmation of a credit event or Characteristics and Risks of Standardized Options (theother contract adjustment may be revoked up to a specified ‘‘Booklet’’) is amended as provided below. This Januarytime prior to exercise settlement. Settlements based on a 2011 Supplement amends and restates the June 2007listing options market’s confirmation of a credit event are Supplement in its entirety to accommodate changesirrevocable even if no credit event has occurred. pertaining to credit default options.

7. Every determination by the listing options market Credit default options, including credit defaultof a redemption event, succession event or credit event will basket options, have characteristics that are differentbe within the listing options market’s sole discretion and will from those of any other options described in the Bookletbe conclusive and binding on all holders and sellers and not at the date of this Supplement. Accordingly, some of thesubject to review. OCC shall have no authority to make such statements and terms in Chapters I and II of the Bookletdeterminations and shall have no responsibility therefor. are inapplicable to credit default options. For example, as

further described in this Booklet, the sentence at the8. Prior to the period when a credit default optionbottom of page 1 and the top of page 2 which notes thathas been automatically exercised, the only means throughthe owner of a cash-settled option has ‘‘the right towhich the holder can realize value from the option is to sell itreceive a cash payment based on the difference betweenat its then market price in an available secondary market. If aa determined value of the underlying interest at the timesecondary market for such an option is not available, it willthe option is exercised and the fixed exercise price of thenot be possible for its holder to realize any value from theoption’’ is not applicable to credit default options. Theoption at that time.description of credit default options in this Supplementsupersedes material in the Booklet applicable to other9. There is no underlying interest for credit defaultstandardized options to the extent such material isoptions that is quoted in the marketplace. Because of this,inconsistent with statements in this Supplement. Creditthere are no underlying interest prices to provide a referencedefault options are described by amendment toto investors for pricing credit default options.Chapter V of the Booklet as follows:

10. As discussed above under the caption ‘‘Other1. The title of Chapter V (on page 29 of the Booklet) isRisks,’’ options markets have discretion to halt trading in an

changed to ‘‘DEBT OPTIONS AND CREDIT DEFAULToption in certain circumstances — such as when the marketOPTIONS’’.determines that the halt would be advisable in maintaining a

fair and orderly market in the option. In the case of credit2. On page 34, the following is inserted immediatelydefault options, options markets may take into

following the paragraph inserted by the May 2010consideration, among other factors, that current quotes forSupplement:debt securities or other securities of the reference entity are

unavailable or have become unreliable.Credit Default Options and

11. The risk that a trading market for particular Credit Default Basket Optionsoptions may become unavailable and the potentialconsequences are also discussed above under the caption Credit default options are based on debt securities of‘‘Other Risks.’’ The SEC has approved certain credit default one or more issuers or guarantors other than the U.S.options for listing and trading on a national securities Treasury. A significant difference between such debtexchange as securities. OCC filed its rules for clearing credit securities and Treasury securities is the non-negligible riskdefault options with the CFTC, and the CFTC issued an that an issuer or guarantor of debt securities other thanexemption permitting OCC to clear such options when Treasury securities may default on its obligations. Fortraded on a national securities exchange whether or not they example, the issuer might not pay the full interest and faceare within the CFTC’s jurisdiction. By its terms, the amount of the securities when due or might file forexemption is revocable, and its revocation would be one of bankruptcy, thereby making it nearly certain that it will notthe events that could lead to the unavailability of a trading make timely payment of the full interest and face amount.market for credit default options. Financial market participants call this credit risk. Credit risk

is an important component of the value of most debtsecurities.

Credit default options relate to the credit risk presentedby one or more specified debt securities, called reference

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obligation(s), of one or more specified issuers or guarantors, Credit default options are binary options in that theyeach of which is called a reference entity. The reference have a specified, all-or-nothing cash settlement amount.obligation(s) and each reference entity for a class of credit Credit default options, however, have additional uniquedefault options are selected by the listing options market. characteristics. For example, credit default options have noWhen a credit default option is based on reference exercise price and cannot be in the money and have noobligation(s) of more than one issuer or guarantor, it is intrinsic value. The discussion of these terms in Chapter Ireferred to as a credit default basket option. There are further and/or Chapter II of the Booklet is therefore inapplicable tovariations on credit default basket options as described credit default options. In addition, a credit default option isbelow. automatically exercised whenever a credit event occurs

within the covered period. Credit default options are thus aA credit default option is automatically exercised and unique style of options and are neither American-style nor

pays a fixed cash settlement amount if a credit event is European-style.confirmed for one or more reference obligations of areference entity prior to expiration of the option. The A credit default basket option is similar to anreference obligations of a reference entity may include all of aggregation of individual credit default options, each basedthe outstanding debt securities constituting general on one or more reference obligations of a different referenceobligations of the reference entity or direct claims on the entity. All of the outstanding debt securities constitutingreference entities (excluding any non-recourse debt). A general obligations of each reference entity or direct claimscredit event may include a failure to make a payment on a on reference entities (excluding non-recourse debt) in thereference obligation and/or any other event(s) that the listing basket may be included in the reference obligations.options market may specify at the time a class of credit

There are two different kinds of credit default basketdefault options is listed. The specified credit event(s) will beoptions. A single payout credit default basket option isdefined in accordance with the terms of the referenceautomatically exercised and pays a specified cashobligation(s). However, not every event that might constitutesettlement amount upon the confirmation of the first creditan event of default by the reference entity under the terms ofevent to occur with respect to a reference obligation of anythe reference obligations will necessarily be specified by theone of the basket’s reference entities. It is exercised onlylisting options market as a credit event. Investors should beonce. Once exercised, the expiration of the option will becertain that they understand the various possible events thataccelerated to correspond to the exercise date. A multiplewill or will not constitute credit events. The determination ofpayout credit default basket option automatically pays awhether a particular event meets the criteria of a credit event,specified cash settlement amount each time a credit event ishowever defined, for a specific credit default option is withinconfirmed with respect to a reference obligation of any onethe sole discretion of the listing options market. of the reference entities during the covered period. In the

In order to result in automatic exercise of the option, a case of either single payout or multiple payout credit defaultcredit event must be confirmed to have occurred during the basket options, the listing options market may specify acovered period (i.e., the period between the initial listing of different cash settlement amount for different referencethe series of options and the time specified by the options entities or may specify the same cash settlement amount formarket as the last day of trading of the option series prior to each reference entity in the basket. The percentage of thethe expiration date). An event that would otherwise be total cash settlement amount that is attributable to anydeemed a credit event will not result in an exercise of the individual reference entity is referred to as its weight in theoption if it occurs either before or after this period. A series of basket. Investors should note that the options markets oncredit default options ordinarily does not expire until a which credit default basket options trade may determinespecified number of business days following the end of the ‘‘weight’’ according to their own specified rules, andcovered period in order to provide the listing options market investors should contact the listing options market foran opportunity to confirm whether or not a credit event information about how it determines weight. In the case of aoccurred within the covered period. If an event otherwise multiple payout credit default basket option, a cashmeeting the definition of a credit event occurs after the end settlement amount will be paid only once with respect to anyof the covered period but before the option expires, the particular reference entity, after which time the affectedoption will not be exercised and will expire worthless. reference entity will be removed from the credit default

basket.If the listing options market determines that a credit

event has occurred within the covered period for a class of Premiums for both credit default options and creditcredit default options, it will provide a credit event default basket options are expressed in points andconfirmation to OCC, and the options will be automatically decimals. In order to obtain the aggregate premium for aexercised. Holders of the exercised options will receive, and single option, the quoted premium is multiplied by awriters will be obligated to pay, the fixed cash settlement premium multiplier specified by the listing options market.amount. If OCC does not receive a credit event confirmationfrom the listing options market before expiration of a seriesof credit default options, the options will expire worthless.

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obligation(s), of one or more specified issuers or guarantors, Credit default options are binary options in that theyeach of which is called a reference entity. The reference have a specified, all-or-nothing cash settlement amount.obligation(s) and each reference entity for a class of credit Credit default options, however, have additional uniquedefault options are selected by the listing options market. characteristics. For example, credit default options have noWhen a credit default option is based on reference exercise price and cannot be in the money and have noobligation(s) of more than one issuer or guarantor, it is intrinsic value. The discussion of these terms in Chapter Ireferred to as a credit default basket option. There are further and/or Chapter II of the Booklet is therefore inapplicable tovariations on credit default basket options as described credit default options. In addition, a credit default option isbelow. automatically exercised whenever a credit event occurs

within the covered period. Credit default options are thus aA credit default option is automatically exercised and unique style of options and are neither American-style nor

pays a fixed cash settlement amount if a credit event is European-style.confirmed for one or more reference obligations of areference entity prior to expiration of the option. The A credit default basket option is similar to anreference obligations of a reference entity may include all of aggregation of individual credit default options, each basedthe outstanding debt securities constituting general on one or more reference obligations of a different referenceobligations of the reference entity or direct claims on the entity. All of the outstanding debt securities constitutingreference entities (excluding any non-recourse debt). A general obligations of each reference entity or direct claimscredit event may include a failure to make a payment on a on reference entities (excluding non-recourse debt) in thereference obligation and/or any other event(s) that the listing basket may be included in the reference obligations.options market may specify at the time a class of credit

There are two different kinds of credit default basketdefault options is listed. The specified credit event(s) will beoptions. A single payout credit default basket option isdefined in accordance with the terms of the referenceautomatically exercised and pays a specified cashobligation(s). However, not every event that might constitutesettlement amount upon the confirmation of the first creditan event of default by the reference entity under the terms ofevent to occur with respect to a reference obligation of anythe reference obligations will necessarily be specified by theone of the basket’s reference entities. It is exercised onlylisting options market as a credit event. Investors should beonce. Once exercised, the expiration of the option will becertain that they understand the various possible events thataccelerated to correspond to the exercise date. A multiplewill or will not constitute credit events. The determination ofpayout credit default basket option automatically pays awhether a particular event meets the criteria of a credit event,specified cash settlement amount each time a credit event ishowever defined, for a specific credit default option is withinconfirmed with respect to a reference obligation of any onethe sole discretion of the listing options market. of the reference entities during the covered period. In the

In order to result in automatic exercise of the option, a case of either single payout or multiple payout credit defaultcredit event must be confirmed to have occurred during the basket options, the listing options market may specify acovered period (i.e., the period between the initial listing of different cash settlement amount for different referencethe series of options and the time specified by the options entities or may specify the same cash settlement amount formarket as the last day of trading of the option series prior to each reference entity in the basket. The percentage of thethe expiration date). An event that would otherwise be total cash settlement amount that is attributable to anydeemed a credit event will not result in an exercise of the individual reference entity is referred to as its weight in theoption if it occurs either before or after this period. A series of basket. Investors should note that the options markets oncredit default options ordinarily does not expire until a which credit default basket options trade may determinespecified number of business days following the end of the ‘‘weight’’ according to their own specified rules, andcovered period in order to provide the listing options market investors should contact the listing options market foran opportunity to confirm whether or not a credit event information about how it determines weight. In the case of aoccurred within the covered period. If an event otherwise multiple payout credit default basket option, a cashmeeting the definition of a credit event occurs after the end settlement amount will be paid only once with respect to anyof the covered period but before the option expires, the particular reference entity, after which time the affectedoption will not be exercised and will expire worthless. reference entity will be removed from the credit default

basket.If the listing options market determines that a credit

event has occurred within the covered period for a class of Premiums for both credit default options and creditcredit default options, it will provide a credit event default basket options are expressed in points andconfirmation to OCC, and the options will be automatically decimals. In order to obtain the aggregate premium for aexercised. Holders of the exercised options will receive, and single option, the quoted premium is multiplied by awriters will be obligated to pay, the fixed cash settlement premium multiplier specified by the listing options market.amount. If OCC does not receive a credit event confirmationfrom the listing options market before expiration of a seriesof credit default options, the options will expire worthless.

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Adjustment of credit default basket options for aADJUSTMENT OF CREDIT DEFAULT OPTIONScomplete redemption. In the case of a single or multiplepayout credit default basket option, if a completeAdjustments may be made to the standardized termsredemption event occurs with respect to one of theof outstanding credit default options when certain eventsreference entities in the basket and no credit event isoccur, such as a succession event or a redemption event,confirmed, pursuant to the rules of the listing optionsboth of which will be defined by the listing options market inmarket, to have occurred prior to the effective date of suchaccordance with the terms of the reference obligations.redemption event, the options will be adjusted by removingAdjustments of credit default options will be within the solethe affected reference entity from the basket of referencediscretion of the listing options market. Investors shouldentities. When a reference entity is deleted from the basketfamiliarize themselves with the listing options market’s rulesof reference entities because of a redemption event, theand procedures governing credit default optioncash settlement amount of the option will be reduced by anadjustments. The listing option market’s rules governingamount reflecting the weight of the deleted reference entityadjustments of outstanding options may be changed within the basket. The relative weights of the other componentsregulatory approval, and the listing options market may havein the basket will remain unchanged, although each willauthority to make such exceptions as it deems appropriaterepresent a proportionally larger percentage of the adjustedto its general adjustment rules. cash settlement amount.

Redemption Event Adjustments. A redemption eventEXAMPLE: Company XYZ is one of ten referenceoccurs when reference obligations of a reference entity are

entities for a class of multiple payout credit default optionredeemed (or paid in full) by, or on behalf of, the issuer. In thecontracts and its 8% May 15, 2022 bond issue is specified ascase of all types of credit default options, if only some of theits only reference obligation. Company XYZ was assigned areference obligations are redeemed, the option is ordinarilyweight of 15% when the credit default option was opened foradjusted such that the remaining reference obligations aretrading. During the life of the option, Company XYZ redeemsthe reference obligations for the option and no otherthe 8% May 15, 2022 bond issue. No reference obligationsadjustment will ordinarily be made. If all of the referenceremain and the listing options market determines that thereobligations of a reference entity are redeemed and there areare no other outstanding debt obligations of the issuerother debt obligations of the reference entity that the listingsuitable for specification as reference obligations. Theoptions market deems appropriate to specify as successorbasket component will be removed from the credit defaultreference obligations, then they will be substituted as thebasket, and the cash settlement amount will be reduced byreference obligations. If, however, all of the reference15%.obligations of a reference entity are redeemed and there are

no other debt obligations of the reference entity that the Succession Event Adjustments. A succession eventlisting options market deems appropriate to specify as occurs when one or more new entities assume one or moresuccessor reference obligations for the reference entity (a reference obligations of a reference entity or become thecomplete redemption), then the adjustment will depend obligor with respect to any obligation that is substituted forupon whether or not there are other reference entities for the the original reference obligations. This may occur, foroptions. example, when a reference entity is merged into a new entityor spins off a part of its business into a new entity. If, as theAdjustment of credit default options for a completeresult of a succession event, more than one entity is theredemption. If there is a complete redemption affecting aobligor of the original reference obligations, or obligationscredit default option, the option will cease trading on thethat were substituted for the original reference obligations,date that the redemption event is confirmed by the listingall of those obligors, including, as the case may be, theoptions market. Expiration of the option will be acceleratedoriginal reference entity, are referred to as successorto a specified number of days following the confirmationreference entities.date of the redemption, and the option will expire

unexercised if, prior to such expiration, no credit event is Adjustment of credit default options after a successionconfirmed to have occurred prior to the effective date of the event. Where a succession event results in assumption of allredemption event. reference obligations by a single entity, the listing optionsmarket will ordinarily adjust the option by substituting theEXAMPLE: Company XYZ is the reference entity for aentity that assumes the reference obligation(s) as the newcredit default option contract and its 8% May 15, 2022 bondreference entity. Where a succession event results in moreissue is the only reference obligation. During the life of thethan one successor reference entity, the credit default optionoption, Company XYZ redeems the 8% May 15, 2022 bondmay be adjusted by dividing it into two or more options.issue and there are no other obligations of Company XYZ

that the listing options market deems to be suitable for EXAMPLE: Company XYZ is the reference entity for aspecifying as successor reference obligations. The option credit default option contract, and its 8% May 15, 2022 bondwill cease trading on the confirmation date, and its expiration issue is the only reference obligation. During the life of thedate will be accelerated. If no credit event is confirmed to option, Company XYZ spins off Company LMN. Companyhave occurred within the covered period, the option will XYZ remains the obligor with respect to 70% of the principalexpire worthless. amount of the original reference obligation. Company LMN

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Adjustment of credit default basket options for aADJUSTMENT OF CREDIT DEFAULT OPTIONScomplete redemption. In the case of a single or multiplepayout credit default basket option, if a completeAdjustments may be made to the standardized termsredemption event occurs with respect to one of theof outstanding credit default options when certain eventsreference entities in the basket and no credit event isoccur, such as a succession event or a redemption event,confirmed, pursuant to the rules of the listing optionsboth of which will be defined by the listing options market inmarket, to have occurred prior to the effective date of suchaccordance with the terms of the reference obligations.redemption event, the options will be adjusted by removingAdjustments of credit default options will be within the solethe affected reference entity from the basket of referencediscretion of the listing options market. Investors shouldentities. When a reference entity is deleted from the basketfamiliarize themselves with the listing options market’s rulesof reference entities because of a redemption event, theand procedures governing credit default optioncash settlement amount of the option will be reduced by anadjustments. The listing option market’s rules governingamount reflecting the weight of the deleted reference entityadjustments of outstanding options may be changed within the basket. The relative weights of the other componentsregulatory approval, and the listing options market may havein the basket will remain unchanged, although each willauthority to make such exceptions as it deems appropriaterepresent a proportionally larger percentage of the adjustedto its general adjustment rules. cash settlement amount.

Redemption Event Adjustments. A redemption eventEXAMPLE: Company XYZ is one of ten referenceoccurs when reference obligations of a reference entity are

entities for a class of multiple payout credit default optionredeemed (or paid in full) by, or on behalf of, the issuer. In thecontracts and its 8% May 15, 2022 bond issue is specified ascase of all types of credit default options, if only some of theits only reference obligation. Company XYZ was assigned areference obligations are redeemed, the option is ordinarilyweight of 15% when the credit default option was opened foradjusted such that the remaining reference obligations aretrading. During the life of the option, Company XYZ redeemsthe reference obligations for the option and no otherthe 8% May 15, 2022 bond issue. No reference obligationsadjustment will ordinarily be made. If all of the referenceremain and the listing options market determines that thereobligations of a reference entity are redeemed and there areare no other outstanding debt obligations of the issuerother debt obligations of the reference entity that the listingsuitable for specification as reference obligations. Theoptions market deems appropriate to specify as successorbasket component will be removed from the credit defaultreference obligations, then they will be substituted as thebasket, and the cash settlement amount will be reduced byreference obligations. If, however, all of the reference15%.obligations of a reference entity are redeemed and there are

no other debt obligations of the reference entity that the Succession Event Adjustments. A succession eventlisting options market deems appropriate to specify as occurs when one or more new entities assume one or moresuccessor reference obligations for the reference entity (a reference obligations of a reference entity or become thecomplete redemption), then the adjustment will depend obligor with respect to any obligation that is substituted forupon whether or not there are other reference entities for the the original reference obligations. This may occur, foroptions. example, when a reference entity is merged into a new entityor spins off a part of its business into a new entity. If, as theAdjustment of credit default options for a completeresult of a succession event, more than one entity is theredemption. If there is a complete redemption affecting aobligor of the original reference obligations, or obligationscredit default option, the option will cease trading on thethat were substituted for the original reference obligations,date that the redemption event is confirmed by the listingall of those obligors, including, as the case may be, theoptions market. Expiration of the option will be acceleratedoriginal reference entity, are referred to as successorto a specified number of days following the confirmationreference entities.date of the redemption, and the option will expire

unexercised if, prior to such expiration, no credit event is Adjustment of credit default options after a successionconfirmed to have occurred prior to the effective date of the event. Where a succession event results in assumption of allredemption event. reference obligations by a single entity, the listing optionsmarket will ordinarily adjust the option by substituting theEXAMPLE: Company XYZ is the reference entity for aentity that assumes the reference obligation(s) as the newcredit default option contract and its 8% May 15, 2022 bondreference entity. Where a succession event results in moreissue is the only reference obligation. During the life of thethan one successor reference entity, the credit default optionoption, Company XYZ redeems the 8% May 15, 2022 bondmay be adjusted by dividing it into two or more options.issue and there are no other obligations of Company XYZ

that the listing options market deems to be suitable for EXAMPLE: Company XYZ is the reference entity for aspecifying as successor reference obligations. The option credit default option contract, and its 8% May 15, 2022 bondwill cease trading on the confirmation date, and its expiration issue is the only reference obligation. During the life of thedate will be accelerated. If no credit event is confirmed to option, Company XYZ spins off Company LMN. Companyhave occurred within the covered period, the option will XYZ remains the obligor with respect to 70% of the principalexpire worthless. amount of the original reference obligation. Company LMN

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becomes the obligor of a new reference obligation that is 2. The sources of price information used to priceissued to holders of the remaining 30% of the original credit default options are subject to a lack of transparencyreference obligation. Company XYZ and LMN are identified and, at times, illiquid markets. This is attributable to, amongby the listing options market as the successor entities. other things: (1) the absence of last sale information and theFollowing the succession event, the credit default option limited availability of quotations for the referencebased on Company XYZ is adjusted into two separate credit obligation(s), (2) lack of ready availability of information ondefault option contracts that specify Company XYZ and related products traded primarily in the over-the-counterCompany LMN as reference entities. The cash settlement market, and (3) the fact that related over-the-counter marketamount of the original credit default option and the premium credit derivative transactions are privately negotiated andmultiplier are allocated between the new credit default may not be made public in a timely fashion or at all.options in accordance with the 70⁄30 division of the reference

3. Dealers in the underlying debt securities and inobligation as specified by the listing options market. the over-the-counter credit derivatives markets have access

Adjustment of credit default basket options after a to private quotation networks that give actual current bidssuccession event. When a succession event occurs with and offers of other dealers. This information is not availablerespect to a reference entity that is included in a single to most investors. As a result, these dealers may have anpayout or multiple payout credit default basket option, the advantage over participants with regard to credit defaultlisting options market will ordinarily adjust the option by options.replacing the affected reference entity with the successor

4. If the listing options market determines that aentity or entities, and, if one or more new obligations arecredit default option is subject to a redemption event (i.e.,issued to replace some or all of the existing referencethe issuer or guarantor pays off the reference obligation), theobligations, the new obligations will be substituted as theoption will expire worthless unless a credit event has beenreference obligations. The listing options market will specifyconfirmed to have occurred prior to the effective date of thethe weight of each new reference entity, and the sum of theredemption event. As a result, purchasers of such optionsweights will equal the weight of the original reference entity.will lose their premium since there is no chance of

EXAMPLE: Company XYZ is one of ten equally occurrence of a credit event for the reference entity. On theweighted reference entities for a multiple payout default other hand, if a redemption event occurs but a credit event isbasket option and its 8% May 15, 2022 bond issue and its confirmed to have occurred prior to the effective date of the8.5% September 1, 2030 bond issue are specified as its only redemption event, a seller would be obligated to pay thereference obligations. During the life of the option, Company cash settlement amount even though a holder of theXYZ spins off Company LMN. Company XYZ remains the reference obligation may not incur a loss.obligor for the 2022 bond issue and LMN becomes the

5. Since succession events are determined by theobligor of a debt security issued to holder of the 2030 bondlisting options market, credit default options may beissue. The listing options market adjusts the option bymodified to specify a different reference entity or severalspecifying XYZ and LMN as the successor reference entities.different reference entities. As a result, there may be newThe reference obligations are the original 2022 bond issuereference obligations that have higher or lower credit qualityand the replacement for the 2030 bond issue. The listingthan the original reference obligation. In addition, otheroptions market determines the appropriate basket weight forfactors may exist that could affect the likelihood of thethe successor reference entities is 7.5% and 2.5%. The sumoccurrence of a credit event. As a result, the occurrence of aof the newly specified weights equals the 10% weight of thesuccession event could affect the price of these options.predecessor basket reference entity (Company XYZ)Moreover, since the listing options market determinesreplaced by the successor reference entities (Company XYZwhether a succession event occurred and the adjustmentand Company LMN).resulting from such an event, the adjustment made to these

3. On page 88, the following is inserted immediately options may be at variance with the treatment given to thefollowing the last paragraph: same succession event with respect to related credit

derivative products.

SPECIAL RISKS OF CREDIT DEFAULT OPTIONS 6. The occurrence of a credit event must beconfirmed by the listing options market. This means that1. Pricing of credit default options is complex. As there will be a lag time between the actual occurrence of astated elsewhere in this document, complexity not well credit event and the listing options market’s confirmation ofunderstood is, in itself, a risk factor. In order to price these the credit event. Rules of the options market may provide aoptions, investors must estimate the probability of default specified time period (e.g., four business days) between thefrom available security or other prices, primarily bond and end of the covered period and the expiration date for a seriescredit default swap (‘‘CDS’’) prices. Models typically used by of credit default options to allow the options market tomarket professionals to infer the probability of default from confirm whether a credit event occurred during the coveredprices may be more complex than the average investor is period. There is a risk, however, that the sources used toused to. monitor a credit event may not identify and report a creditevent in a timely fashion. For example, it is possible that acredit event could occur on the last day of trading, but the

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becomes the obligor of a new reference obligation that is 2. The sources of price information used to priceissued to holders of the remaining 30% of the original credit default options are subject to a lack of transparencyreference obligation. Company XYZ and LMN are identified and, at times, illiquid markets. This is attributable to, amongby the listing options market as the successor entities. other things: (1) the absence of last sale information and theFollowing the succession event, the credit default option limited availability of quotations for the referencebased on Company XYZ is adjusted into two separate credit obligation(s), (2) lack of ready availability of information ondefault option contracts that specify Company XYZ and related products traded primarily in the over-the-counterCompany LMN as reference entities. The cash settlement market, and (3) the fact that related over-the-counter marketamount of the original credit default option and the premium credit derivative transactions are privately negotiated andmultiplier are allocated between the new credit default may not be made public in a timely fashion or at all.options in accordance with the 70⁄30 division of the reference

3. Dealers in the underlying debt securities and inobligation as specified by the listing options market. the over-the-counter credit derivatives markets have access

Adjustment of credit default basket options after a to private quotation networks that give actual current bidssuccession event. When a succession event occurs with and offers of other dealers. This information is not availablerespect to a reference entity that is included in a single to most investors. As a result, these dealers may have anpayout or multiple payout credit default basket option, the advantage over participants with regard to credit defaultlisting options market will ordinarily adjust the option by options.replacing the affected reference entity with the successor

4. If the listing options market determines that aentity or entities, and, if one or more new obligations arecredit default option is subject to a redemption event (i.e.,issued to replace some or all of the existing referencethe issuer or guarantor pays off the reference obligation), theobligations, the new obligations will be substituted as theoption will expire worthless unless a credit event has beenreference obligations. The listing options market will specifyconfirmed to have occurred prior to the effective date of thethe weight of each new reference entity, and the sum of theredemption event. As a result, purchasers of such optionsweights will equal the weight of the original reference entity.will lose their premium since there is no chance of

EXAMPLE: Company XYZ is one of ten equally occurrence of a credit event for the reference entity. On theweighted reference entities for a multiple payout default other hand, if a redemption event occurs but a credit event isbasket option and its 8% May 15, 2022 bond issue and its confirmed to have occurred prior to the effective date of the8.5% September 1, 2030 bond issue are specified as its only redemption event, a seller would be obligated to pay thereference obligations. During the life of the option, Company cash settlement amount even though a holder of theXYZ spins off Company LMN. Company XYZ remains the reference obligation may not incur a loss.obligor for the 2022 bond issue and LMN becomes the

5. Since succession events are determined by theobligor of a debt security issued to holder of the 2030 bondlisting options market, credit default options may beissue. The listing options market adjusts the option bymodified to specify a different reference entity or severalspecifying XYZ and LMN as the successor reference entities.different reference entities. As a result, there may be newThe reference obligations are the original 2022 bond issuereference obligations that have higher or lower credit qualityand the replacement for the 2030 bond issue. The listingthan the original reference obligation. In addition, otheroptions market determines the appropriate basket weight forfactors may exist that could affect the likelihood of thethe successor reference entities is 7.5% and 2.5%. The sumoccurrence of a credit event. As a result, the occurrence of aof the newly specified weights equals the 10% weight of thesuccession event could affect the price of these options.predecessor basket reference entity (Company XYZ)Moreover, since the listing options market determinesreplaced by the successor reference entities (Company XYZwhether a succession event occurred and the adjustmentand Company LMN).resulting from such an event, the adjustment made to these

3. On page 88, the following is inserted immediately options may be at variance with the treatment given to thefollowing the last paragraph: same succession event with respect to related credit

derivative products.

SPECIAL RISKS OF CREDIT DEFAULT OPTIONS 6. The occurrence of a credit event must beconfirmed by the listing options market. This means that1. Pricing of credit default options is complex. As there will be a lag time between the actual occurrence of astated elsewhere in this document, complexity not well credit event and the listing options market’s confirmation ofunderstood is, in itself, a risk factor. In order to price these the credit event. Rules of the options market may provide aoptions, investors must estimate the probability of default specified time period (e.g., four business days) between thefrom available security or other prices, primarily bond and end of the covered period and the expiration date for a seriescredit default swap (‘‘CDS’’) prices. Models typically used by of credit default options to allow the options market tomarket professionals to infer the probability of default from confirm whether a credit event occurred during the coveredprices may be more complex than the average investor is period. There is a risk, however, that the sources used toused to. monitor a credit event may not identify and report a creditevent in a timely fashion. For example, it is possible that acredit event could occur on the last day of trading, but the

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sources which report the occurrence of a credit event do notmake this information publicly available until after theexpiration date. In this case, the cash settlement value of acredit default option would be zero. There is also a risk that JANUARY 2011the listing options market may determine that a credit eventhas occurred based on information available to it when in SUPPLEMENTfact no credit event has occurred. This could happen, forexample, if the sources used to confirm the credit event areerroneous. The rules of OCC and/or the listing options The February 1994 version of the booklet entitledmarket may provide that a confirmation of a credit event or Characteristics and Risks of Standardized Options (theother contract adjustment may be revoked up to a specified ‘‘Booklet’’) is amended as provided below. This Januarytime prior to exercise settlement. Settlements based on a 2011 Supplement amends and restates the June 2007listing options market’s confirmation of a credit event are Supplement in its entirety to accommodate changesirrevocable even if no credit event has occurred. pertaining to credit default options.

7. Every determination by the listing options market Credit default options, including credit defaultof a redemption event, succession event or credit event will basket options, have characteristics that are differentbe within the listing options market’s sole discretion and will from those of any other options described in the Bookletbe conclusive and binding on all holders and sellers and not at the date of this Supplement. Accordingly, some of thesubject to review. OCC shall have no authority to make such statements and terms in Chapters I and II of the Bookletdeterminations and shall have no responsibility therefor. are inapplicable to credit default options. For example, as

further described in this Booklet, the sentence at the8. Prior to the period when a credit default optionbottom of page 1 and the top of page 2 which notes thathas been automatically exercised, the only means throughthe owner of a cash-settled option has ‘‘the right towhich the holder can realize value from the option is to sell itreceive a cash payment based on the difference betweenat its then market price in an available secondary market. If aa determined value of the underlying interest at the timesecondary market for such an option is not available, it willthe option is exercised and the fixed exercise price of thenot be possible for its holder to realize any value from theoption’’ is not applicable to credit default options. Theoption at that time.description of credit default options in this Supplementsupersedes material in the Booklet applicable to other9. There is no underlying interest for credit defaultstandardized options to the extent such material isoptions that is quoted in the marketplace. Because of this,inconsistent with statements in this Supplement. Creditthere are no underlying interest prices to provide a referencedefault options are described by amendment toto investors for pricing credit default options.Chapter V of the Booklet as follows:

10. As discussed above under the caption ‘‘Other1. The title of Chapter V (on page 29 of the Booklet) isRisks,’’ options markets have discretion to halt trading in an

changed to ‘‘DEBT OPTIONS AND CREDIT DEFAULToption in certain circumstances — such as when the marketOPTIONS’’.determines that the halt would be advisable in maintaining a

fair and orderly market in the option. In the case of credit2. On page 34, the following is inserted immediatelydefault options, options markets may take into

following the paragraph inserted by the May 2010consideration, among other factors, that current quotes forSupplement:debt securities or other securities of the reference entity are

unavailable or have become unreliable.Credit Default Options and

11. The risk that a trading market for particular Credit Default Basket Optionsoptions may become unavailable and the potentialconsequences are also discussed above under the caption Credit default options are based on debt securities of‘‘Other Risks.’’ The SEC has approved certain credit default one or more issuers or guarantors other than the U.S.options for listing and trading on a national securities Treasury. A significant difference between such debtexchange as securities. OCC filed its rules for clearing credit securities and Treasury securities is the non-negligible riskdefault options with the CFTC, and the CFTC issued an that an issuer or guarantor of debt securities other thanexemption permitting OCC to clear such options when Treasury securities may default on its obligations. Fortraded on a national securities exchange whether or not they example, the issuer might not pay the full interest and faceare within the CFTC’s jurisdiction. By its terms, the amount of the securities when due or might file forexemption is revocable, and its revocation would be one of bankruptcy, thereby making it nearly certain that it will notthe events that could lead to the unavailability of a trading make timely payment of the full interest and face amount.market for credit default options. Financial market participants call this credit risk. Credit risk

is an important component of the value of most debtsecurities.

Credit default options relate to the credit risk presentedby one or more specified debt securities, called reference

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non-current information. This may occur as a result of delaysor interruptions in the market for the reference security or thecomponent securities of the underlying index or thereference index (which are the same in the case of realized MARCH 2011variability indexes).

SUPPLEMENT14. As in the case of writers of other index options,writers of variability options, strategy-based index options orrelative performance options cannot provide in advance for

The February 1994 version of the booklet entitledtheir potential settlement obligations by acquiring theCharacteristics and Risks of Standardized Options (theunderlying interest. Offsetting the risk of writing a variability‘‘Booklet’’) is amended as provided below to accommodateoption, strategy-based index option or relative performance(i) options on any index intended to measure the impliedoption may be even more difficult than offsetting the risk ofvolatility of a single reference security; and (ii) options onwriting other index options. Even where some offsetting ofrelative performance indexes. risk is possible, there are timing risks and other risks

analogous to those discussed in paragraphs 3 and 4 on 1. The first full paragraph on page 2 of the Booklet, aspages 74 and 75 of the booklet whenever an investor amended by the May 2007, December 2009 and Mayattempts to employ strategies involving transactions in 2010 Supplements, is replaced by the following:variability options, strategy-based index options or relative

Each options market selects the underlying interestsperformance options and transactions in stocks or inon which options are traded on that market. Options areoptions, futures contracts or other investments related tocurrently available covering four types of underlyingstocks.interests: equity securities (which term includes ‘‘fund

15. The following paragraph is inserted on page 78 of the shares’’ described in Chapter III), indexes (including stock,Booklet immediately following the paragraph that was variability, strategy-based, dividend and relativeadded as paragraph 16 under the section captioned performance indexes), debt securities and credit events,‘‘Special Risks of Index Options’’ by the December and foreign currencies. Options on other types of underlying2009 Supplement: interests may become available in the future.17. In the event that one of the index components of a 2. The first three paragraphs on page 23 of the Booklet,

relative performance index is eliminated as a result of a under the caption ‘‘About Indexes,’’ as amended by thecash-out merger or other event, the reporting authority may December 2009 Supplement, are replaced by thecease to publish the value of the relative performance index following:and the market on which options on that relative

As referred to in this booklet, an index is a measure ofperformance index are traded may determine to acceleratethe prices or other attributes of a group of securities* orthe expiration date of the options (and, in the case ofother interests. Although indexes have been developed toEuropean-style options, their exercisability). In that case, thecover a variety of interests, such as stocks and other equityexercise settlement value of the options would become fixedsecurities, debt securities and foreign currencies, and evenbased upon the last published value for the underlyingto measure the cost of living, the following discussion relatesrelative performance index. As a result, all such options thatonly to (i) indexes on equity securities (which are calledare not in the money will become worthless and all that are instock indexes in this booklet), (ii) indexes intended tothe money will have no time value. Holders of anmeasure the implied volatility, or the realized variance orin-the-money option whose expiration date is acceleratedvolatility, of specified stock indexes or specified securitiesmust be prepared to exercise that option prior to the(which are collectively called variability indexes in thisaccelerated exercise cut-off time in order to prevent thebooklet), (iii) strategy-based indexes, such as indexesoption from expiring unexercised. Writers of a European-measuring the return of a particular strategy involving thestyle option whose expiration date is subject to beingcomponent securities of a stock index and options on thataccelerated bear the risk that, in the event of such anindex, (iv) indexes intended to measure the stock priceacceleration, they may be assigned an exercise notice andchanges of the component securities of underlying indexesbe required to perform their obligations as writers prior to thethat result solely from the distribution of ordinary cashoriginal expiration date. As with any other option for whichdividends, as calculated on their respective ex-dividendthe expiration date is accelerated, no adjustment would bedates (which are called dividend indexes in this booklet),made to compensate for the accelerated expiration date of a(v) relative performance indexes, which are a special typerelative performance option.of strategy-based indexes that measure the relative

* Some indexes reflect values of companies, rather thansecurities, by taking into account both the prices ofcomponent securities and the number of those securitiesoutstanding.

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performance over a given time period of one index But this relationship does not always hold true and,component to another index component, and (vi) options on indeed, a variability index may be rising at a time when itsthe above indexes (including binary index options and range reference index or the price of its reference security is alsooptions). rising.

Stock indexes are compiled and published by various 5. The last sentence of the third paragraph under thesources, including securities markets. A stock index may be heading ‘‘Variability Indexes,’’ which is part of thedesigned to be representative of the stock market of a discussion that was added on page 25 of the Booklet byparticular nation as a whole, of securities traded in a the December 2009 Supplement, is replaced by theparticular market, of a broad market sector (e.g., industrials), following:or of a particular industry (e.g., electronics). A stock index

Whether the variability option is in the money ismay be based on securities traded primarily in U.S. markets,determined in relation only to the value of the underlyingsecurities traded primarily in a foreign market, or avariability index, and not in relation to the reference index orcombination of securities whose primary markets are inreference security.various countries. A stock index may be based on the prices

of all, or only a sample, of the securities whose prices it is 6. The fifth paragraph under the heading ‘‘Variabilityintended to represent. Like stock indexes, variability Indexes,’’ which is part of the discussion that wasindexes, strategy-based indexes, dividend indexes and added on page 25 of the Booklet by the Decemberrelative performance indexes are securities indexes. 2009 Supplement, is replaced by the following:However, variability indexes may measure the impliedvolatility of an index, using the premiums for series of As of the date of this Supplement, options areoptions on that index, or may measure the historical approved for trading on three different types of variabilityvariance or volatility of the returns of an index using daily indexes representing three different ways of measuringreturns over a certain period assuming a mean daily return variability. A realized variance index represents the variabilityof zero. Strategy-based indexes measure the return of a of returns of a specified reference index or reference securityparticular strategy involving the component securities of an (in either case, a ‘‘reference interest’’) over a specifiedindex and options on that index. Dividend indexes measure period of time relative to an average (mean) daily return ofthe stock price changes of the component securities of zero. The realized volatility of the same index over the sameunderlying indexes that result solely from the distribution of time period, also referred to as the standard deviation, isordinary cash dividends, as calculated on their respective equal to the square root of the realized variance. Both ofex-dividend dates. Relative performance indexes measure these measures are calculated from historical index valuesthe performance of two index components relative to one over the relevant period of time. An implied volatility index isanother over a period of time. In this booklet options on a measure of the predicted future variability of the referencevariability indexes are referred to generically as variability interest over a specified future time period. It measures theoptions, options on strategy-based indexes are referred to predicted standard deviation of the daily returns of theas strategy-based index options, options on dividend reference interest measured over the specified future timeindexes are referred to as dividend index options and period. An implied volatility index reflects predictions aboutoptions on relative performance indexes are referred to as the future volatility of the reference interest as thoserelative performance options. predictions are implied by reported current premium values

for options on the reference interest. The realized volatility ofInformation relating specifically to the various types of the reference interest may not conform to those predictions.

indexes appears below under the captions ‘‘Stock Indexes,’’‘‘Variability Indexes,’’ ‘‘Strategy-based Indexes,’’ ‘‘Dividend 7. The sixth paragraph under the heading ‘‘VariabilityIndexes’’ and ‘‘Relative Performance Indexes.’’ Indexes,’’ which is part of the discussion that was

added on page 25 of the Booklet by the December3. The first sentence of the second paragraph under the 2009 Supplement, is replaced by the following:

caption ‘‘Variability Indexes,’’ which is part of thediscussion that was added on page 25 of the Booklet by There are various methods of estimating impliedthe December 2009 Supplement, is replaced by the volatility, and different methods may provide differentfollowing: estimates. Under the method that is used for volatility

options that are traded at the date of this Supplement,Economic, political, social and other events affecting implied volatility index values are calculated using premium

the level of the reference index or the price of the reference values of options on the reference interest in expirationsecurity may also affect the variability of the reference index months that are selected and weighted to yield a measure ofor reference security. the volatility of the reference interest over a specified future

time period. For example, an implied volatility index that is4. The last sentence of the second paragraph under thecalculated using this method and that is designed to providecaption ‘‘Variability Indexes,’’ which is part of thea prediction of volatility over 30 calendar days is based ondiscussion that was added on page 25 of the Booklet bypremium values of options on the reference interest expiringthe December 2009 Supplement, is replaced by thein the two nearest months with at least 8 calendar days left tofollowing:

176 177

performance over a given time period of one index But this relationship does not always hold true and,component to another index component, and (vi) options on indeed, a variability index may be rising at a time when itsthe above indexes (including binary index options and range reference index or the price of its reference security is alsooptions). rising.

Stock indexes are compiled and published by various 5. The last sentence of the third paragraph under thesources, including securities markets. A stock index may be heading ‘‘Variability Indexes,’’ which is part of thedesigned to be representative of the stock market of a discussion that was added on page 25 of the Booklet byparticular nation as a whole, of securities traded in a the December 2009 Supplement, is replaced by theparticular market, of a broad market sector (e.g., industrials), following:or of a particular industry (e.g., electronics). A stock index

Whether the variability option is in the money ismay be based on securities traded primarily in U.S. markets,determined in relation only to the value of the underlyingsecurities traded primarily in a foreign market, or avariability index, and not in relation to the reference index orcombination of securities whose primary markets are inreference security.various countries. A stock index may be based on the prices

of all, or only a sample, of the securities whose prices it is 6. The fifth paragraph under the heading ‘‘Variabilityintended to represent. Like stock indexes, variability Indexes,’’ which is part of the discussion that wasindexes, strategy-based indexes, dividend indexes and added on page 25 of the Booklet by the Decemberrelative performance indexes are securities indexes. 2009 Supplement, is replaced by the following:However, variability indexes may measure the impliedvolatility of an index, using the premiums for series of As of the date of this Supplement, options areoptions on that index, or may measure the historical approved for trading on three different types of variabilityvariance or volatility of the returns of an index using daily indexes representing three different ways of measuringreturns over a certain period assuming a mean daily return variability. A realized variance index represents the variabilityof zero. Strategy-based indexes measure the return of a of returns of a specified reference index or reference securityparticular strategy involving the component securities of an (in either case, a ‘‘reference interest’’) over a specifiedindex and options on that index. Dividend indexes measure period of time relative to an average (mean) daily return ofthe stock price changes of the component securities of zero. The realized volatility of the same index over the sameunderlying indexes that result solely from the distribution of time period, also referred to as the standard deviation, isordinary cash dividends, as calculated on their respective equal to the square root of the realized variance. Both ofex-dividend dates. Relative performance indexes measure these measures are calculated from historical index valuesthe performance of two index components relative to one over the relevant period of time. An implied volatility index isanother over a period of time. In this booklet options on a measure of the predicted future variability of the referencevariability indexes are referred to generically as variability interest over a specified future time period. It measures theoptions, options on strategy-based indexes are referred to predicted standard deviation of the daily returns of theas strategy-based index options, options on dividend reference interest measured over the specified future timeindexes are referred to as dividend index options and period. An implied volatility index reflects predictions aboutoptions on relative performance indexes are referred to as the future volatility of the reference interest as thoserelative performance options. predictions are implied by reported current premium values

for options on the reference interest. The realized volatility ofInformation relating specifically to the various types of the reference interest may not conform to those predictions.

indexes appears below under the captions ‘‘Stock Indexes,’’‘‘Variability Indexes,’’ ‘‘Strategy-based Indexes,’’ ‘‘Dividend 7. The sixth paragraph under the heading ‘‘VariabilityIndexes’’ and ‘‘Relative Performance Indexes.’’ Indexes,’’ which is part of the discussion that was

added on page 25 of the Booklet by the December3. The first sentence of the second paragraph under the 2009 Supplement, is replaced by the following:

caption ‘‘Variability Indexes,’’ which is part of thediscussion that was added on page 25 of the Booklet by There are various methods of estimating impliedthe December 2009 Supplement, is replaced by the volatility, and different methods may provide differentfollowing: estimates. Under the method that is used for volatility

options that are traded at the date of this Supplement,Economic, political, social and other events affecting implied volatility index values are calculated using premium

the level of the reference index or the price of the reference values of options on the reference interest in expirationsecurity may also affect the variability of the reference index months that are selected and weighted to yield a measure ofor reference security. the volatility of the reference interest over a specified future

time period. For example, an implied volatility index that is4. The last sentence of the second paragraph under thecalculated using this method and that is designed to providecaption ‘‘Variability Indexes,’’ which is part of thea prediction of volatility over 30 calendar days is based ondiscussion that was added on page 25 of the Booklet bypremium values of options on the reference interest expiringthe December 2009 Supplement, is replaced by thein the two nearest months with at least 8 calendar days left tofollowing:

176 177

expiration. Implied volatility index values will be affected by case, the exercise settlement value of the options wouldany factor that affects the component options series of the become fixed based upon the last published value for theindex, including, among other things, applicable laws, index, and the market on which the options are traded mayregulations and trading rules, the market-making and order determine to accelerate the expiration date for the optionsprocessing systems of the markets on which the options are (and, in the case of European-style options, theirtraded, and the liquidity and efficiency of those markets. exercisability). The expiration date will ordinarily be

accelerated to fall on the next standard expiration date for8. The first and second sentences of the ninth paragraph options as specified in OCC’s rules or on such other date as

under the heading ‘‘Variability Indexes,’’ which is part of OCC establishes in consultation with the market on whichthe discussion that was added on page 25 of the the options are traded. All options that are not in the moneyBooklet by the December 2009 Supplement, are will become worthless and all that are in the money will havereplaced by the following: no time value. Holders of an in-the-money option whose

expiration date is accelerated must be prepared to exerciseInvestors should keep in mind that indicative values ofthat option prior to the accelerated exercise cut-off time inan implied volatility index can reflect changes in the impliedorder to prevent the option from expiring unexercised.volatility of the reference interest only to the extent thatWriters of European-style options whose expiration date isquotations of the component options of the index aresubject to being accelerated bear the risk that, in the event ofcurrent. Indicative values for an implied volatility index maysuch an acceleration, they may be assigned an exercisebe disseminated, and implied volatility options may benotice and be required to perform their obligations as writerstraded, during times when the reference security or one orprior to the original expiration date. As with any other optionmore component securities in the reference index are notfor which the expiration date is accelerated, no adjustmenttrading, or when the quotations for the reference security orwould be made to compensate for the acceleratedone or more of the options series comprising the impliedexpiration date of a relative performance option.volatility index are not current. 10. The caption ‘‘Stock Indexes, Variability Indexes,9. The following caption and paragraphs are added to

Strategy-Based Indexes and Dividend Indexes,’’ as itChapter IV of the Booklet immediately following theappears in the December 2009 Supplement as thesection captioned ‘‘Strategy-Based Indexes,’’ which isheading of the section immediately preceding thepart of the discussion that was added on page 25 of thesection captioned ‘‘Features of Index Options’’Booklet by the December 2009 Supplement:beginning on page 26 of the Booklet, is replaced by thenew caption ‘‘Information Concerning UnderlyingIndexes.’’RELATIVE PERFORMANCE INDEXES

11. The first paragraph appearing under the captionA relative performance index measures the relative ‘‘Features of Index Options’’ on page 26 of the Booklet,performance — generally the relative total return — of two as amended by the June 2008 Supplement, is replacedindex components. As of the date of this booklet, the only by the following:relative performance options approved for trading areoptions on indexes of which both index components are All index options that are traded on the date of thisequity securities (one of which could be a fund share). One booklet are cash-settled. Cash-settled index options do notof the components in each pair is referred to as the target relate to a particular number of shares. Rather, the ‘‘size’’ ofcomponent and the second is referred to as the benchmark a cash-settled index option is determined by the multiplier ofcomponent. The index is calculated by measuring the total the option. The ‘‘size’’ of a range option is determined by itsreturn of the target component relative to the total return of multiplier and maximum range exercise value, and is equalthe benchmark component. The index will rise as and to the to the maximum cash settlement amount (i.e., the maximumextent that the target component outperforms the range exercise value times the multiplier). In the case of abenchmark component, and will fall as and to the extent that binary index option, the ‘‘size’’ of the contract is simply itsthe opposite occurs. The value of the relative performance fixed cash settlement amount, which for certain binary indexindex will be set to a base value (e.g., 100) initially. options is defined as the product of a fixed settlement value

times a multiplier.Investors should be certain that they understand themethod of calculation of any relative performance index and 12. The following caption and paragraphs are inserted atthe uses for which relative performance options are suited the end of page 27 of the Booklet:before buying or selling such options. Different relativeperformance indexes may measure relative performance indifferent ways. Investors should contact the listing optionsmarket for information on the method of calculation of a ADJUSTMENT OF INDEX OPTIONSparticular relative performance index.

No adjustments will ordinarily be made in the terms ofIn the event that one of the index components in an index option contracts in the event that index components

underlying relative performance index is eliminated as the are added to or deleted from the underlying index orresult of a cash-out merger or other event, the reporting reference index or when the relative weight of one or moreauthority may cease to publish the value of the index. In that such index components has changed. However, if an

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expiration. Implied volatility index values will be affected by case, the exercise settlement value of the options wouldany factor that affects the component options series of the become fixed based upon the last published value for theindex, including, among other things, applicable laws, index, and the market on which the options are traded mayregulations and trading rules, the market-making and order determine to accelerate the expiration date for the optionsprocessing systems of the markets on which the options are (and, in the case of European-style options, theirtraded, and the liquidity and efficiency of those markets. exercisability). The expiration date will ordinarily be

accelerated to fall on the next standard expiration date for8. The first and second sentences of the ninth paragraph options as specified in OCC’s rules or on such other date as

under the heading ‘‘Variability Indexes,’’ which is part of OCC establishes in consultation with the market on whichthe discussion that was added on page 25 of the the options are traded. All options that are not in the moneyBooklet by the December 2009 Supplement, are will become worthless and all that are in the money will havereplaced by the following: no time value. Holders of an in-the-money option whose

expiration date is accelerated must be prepared to exerciseInvestors should keep in mind that indicative values ofthat option prior to the accelerated exercise cut-off time inan implied volatility index can reflect changes in the impliedorder to prevent the option from expiring unexercised.volatility of the reference interest only to the extent thatWriters of European-style options whose expiration date isquotations of the component options of the index aresubject to being accelerated bear the risk that, in the event ofcurrent. Indicative values for an implied volatility index maysuch an acceleration, they may be assigned an exercisebe disseminated, and implied volatility options may benotice and be required to perform their obligations as writerstraded, during times when the reference security or one orprior to the original expiration date. As with any other optionmore component securities in the reference index are notfor which the expiration date is accelerated, no adjustmenttrading, or when the quotations for the reference security orwould be made to compensate for the acceleratedone or more of the options series comprising the impliedexpiration date of a relative performance option.volatility index are not current. 10. The caption ‘‘Stock Indexes, Variability Indexes,9. The following caption and paragraphs are added to

Strategy-Based Indexes and Dividend Indexes,’’ as itChapter IV of the Booklet immediately following theappears in the December 2009 Supplement as thesection captioned ‘‘Strategy-Based Indexes,’’ which isheading of the section immediately preceding thepart of the discussion that was added on page 25 of thesection captioned ‘‘Features of Index Options’’Booklet by the December 2009 Supplement:beginning on page 26 of the Booklet, is replaced by thenew caption ‘‘Information Concerning UnderlyingIndexes.’’RELATIVE PERFORMANCE INDEXES

11. The first paragraph appearing under the captionA relative performance index measures the relative ‘‘Features of Index Options’’ on page 26 of the Booklet,performance — generally the relative total return — of two as amended by the June 2008 Supplement, is replacedindex components. As of the date of this booklet, the only by the following:relative performance options approved for trading areoptions on indexes of which both index components are All index options that are traded on the date of thisequity securities (one of which could be a fund share). One booklet are cash-settled. Cash-settled index options do notof the components in each pair is referred to as the target relate to a particular number of shares. Rather, the ‘‘size’’ ofcomponent and the second is referred to as the benchmark a cash-settled index option is determined by the multiplier ofcomponent. The index is calculated by measuring the total the option. The ‘‘size’’ of a range option is determined by itsreturn of the target component relative to the total return of multiplier and maximum range exercise value, and is equalthe benchmark component. The index will rise as and to the to the maximum cash settlement amount (i.e., the maximumextent that the target component outperforms the range exercise value times the multiplier). In the case of abenchmark component, and will fall as and to the extent that binary index option, the ‘‘size’’ of the contract is simply itsthe opposite occurs. The value of the relative performance fixed cash settlement amount, which for certain binary indexindex will be set to a base value (e.g., 100) initially. options is defined as the product of a fixed settlement value

times a multiplier.Investors should be certain that they understand themethod of calculation of any relative performance index and 12. The following caption and paragraphs are inserted atthe uses for which relative performance options are suited the end of page 27 of the Booklet:before buying or selling such options. Different relativeperformance indexes may measure relative performance indifferent ways. Investors should contact the listing optionsmarket for information on the method of calculation of a ADJUSTMENT OF INDEX OPTIONSparticular relative performance index.

No adjustments will ordinarily be made in the terms ofIn the event that one of the index components in an index option contracts in the event that index components

underlying relative performance index is eliminated as the are added to or deleted from the underlying index orresult of a cash-out merger or other event, the reporting reference index or when the relative weight of one or moreauthority may cease to publish the value of the index. In that such index components has changed. However, if an

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adjustment panel determines that any such addition, 14. The paragraphs that were added on page 78 of thedeletion, or change causes significant discontinuity in the Booklet as paragraphs 12 through 14 under the sectionlevel of the underlying index or reference index, the panel captioned ‘‘Special Risks of Index Options’’ by themay adjust the terms of the affected index option contracts December 2009 Supplement are replaced by theby adjusting the index multiplier and/or exercise price with following:respect to such contracts or by taking such other action as

12. Strategies involving the purchase and sale ofthe panel deems fair to both the holders and writers of suchoptions on a variability index, strategy-based index orcontracts.relative performance index are inherently complex and

If the option market on which an option series is traded require a thorough understanding of the concepts that areshould increase or decrease the index multiplier for any measured by these indexes. Investors must understand theindex option contract, or the reporting authority should method used to calculate the index in order to understandchange the method of calculation of an underlying index or how conditions in the market for the component securitiesreference index so as to create a discontinuity or change in used to calculate its value may affect the value of the index.the level of the index that does not reflect a change in the Investors may fail to realize their investment objective even ifprices or values of the index components, or a successor they have correctly predicted certain events if they do notindex (as defined in the paragraph below) should be understand how those events may or may not affect the levelsubstituted for an underlying index or reference index, the of the index. The component securities of an impliedadjustment panel may make such adjustments in the volatility index are put and call options (not stocks, which arenumber of outstanding affected options or the exercise the component securities of stock indexes). A realizedprices of such options or such other adjustments, if any, as variability index, on the other hand, measures the actualthe panel deems fair to both the holders and the writers of volatility of an index and is calculated directly from the valuessuch options. of the reference index. There is no assurance that predicted

volatility as measured by a particular implied volatility indexThe adjustment panel may substitute another index (a will correspond to the actual volatility of the reference

successor index) for an underlying index or reference index interest or to measures of predicted volatility calculatedin the event the panel determines that: (i) publication of the using other methods. A strategy-based index may beunderlying index or reference index has been discontinued; calculated from the prices of multiple component securities(ii) the underlying index or reference index has been of different types, such as in the case of a buy-write indexreplaced by another index; or (iii) the composition or method measuring the return of a strategy that involves transactionsof calculation of an underlying index or reference index is so in stocks and options. The return from a particular strategymaterially changed since its selection as an underlying index as measured by a strategy-based index may differ from theor reference index that it is deemed to be a different index. A actual returns that an investor following that strategysuccessor index will be reasonably comparable to the achieves, because of assumptions regarding transactionsoriginal underlying index or reference index for which it and the failure to take into account significant factors suchsubstitutes. An index may be created specifically for the as taxes and transaction costs. Different relativepurpose of becoming a successor index. performance indexes may measure relative performance in

different ways. Investors should contact the listing optionsThe adjustment panel’s determinations shall bemarket for information on the method of calculation of aconclusive, binding on all investors, and not subject toparticular variability index, strategy-based index or relativereview.performance index.

13. The paragraph that was added immediately following13. Persons who exercise variability options,the caption ‘‘Special Risks of Index Options’’ on

strategy-based index options or relative performancepage 73 of the Booklet by the December 2009options or are assigned exercises based on an erroneousSupplement is replaced by the following:index level will ordinarily be required to make settlement

The risks described in paragraphs 1 through 10 on based on the exercise settlement value as initially reportedpages 73 through 78 of this booklet relate primarily to by the designated reporting authority for the index, even if aoptions on stock indexes. The risks described in corrected value is subsequently announced. Inparagraph 11 relate to options on implied volatility indexes. extraordinary circumstances (e.g., where an exerciseThe risks described in paragraphs 12 through 14 relate to settlement value as initially reported is obviously wrong, andoptions on variability indexes, strategy-based indexes or a corrected value is promptly announced), OCC hasrelative performance indexes. The risks described in discretion to direct that exercise settlements be based on aparagraph 15 relate to delayed start options. The risk corrected exercise settlement value. Ordinarily, however, thedescribed in paragraph 16 relates to dividend index options, exercise settlement value as initially reported by theand the risks described in paragraphs 17 relate to relative designated reporting authority for the underlying variabilityperformance options. index will be conclusive for exercise settlement purposes. As

described in paragraph 8. on page 77 with respect to otherindexes, reported levels of a variability index, strategy-basedindex or relative performance index may be based on

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adjustment panel determines that any such addition, 14. The paragraphs that were added on page 78 of thedeletion, or change causes significant discontinuity in the Booklet as paragraphs 12 through 14 under the sectionlevel of the underlying index or reference index, the panel captioned ‘‘Special Risks of Index Options’’ by themay adjust the terms of the affected index option contracts December 2009 Supplement are replaced by theby adjusting the index multiplier and/or exercise price with following:respect to such contracts or by taking such other action as

12. Strategies involving the purchase and sale ofthe panel deems fair to both the holders and writers of suchoptions on a variability index, strategy-based index orcontracts.relative performance index are inherently complex and

If the option market on which an option series is traded require a thorough understanding of the concepts that areshould increase or decrease the index multiplier for any measured by these indexes. Investors must understand theindex option contract, or the reporting authority should method used to calculate the index in order to understandchange the method of calculation of an underlying index or how conditions in the market for the component securitiesreference index so as to create a discontinuity or change in used to calculate its value may affect the value of the index.the level of the index that does not reflect a change in the Investors may fail to realize their investment objective even ifprices or values of the index components, or a successor they have correctly predicted certain events if they do notindex (as defined in the paragraph below) should be understand how those events may or may not affect the levelsubstituted for an underlying index or reference index, the of the index. The component securities of an impliedadjustment panel may make such adjustments in the volatility index are put and call options (not stocks, which arenumber of outstanding affected options or the exercise the component securities of stock indexes). A realizedprices of such options or such other adjustments, if any, as variability index, on the other hand, measures the actualthe panel deems fair to both the holders and the writers of volatility of an index and is calculated directly from the valuessuch options. of the reference index. There is no assurance that predicted

volatility as measured by a particular implied volatility indexThe adjustment panel may substitute another index (a will correspond to the actual volatility of the reference

successor index) for an underlying index or reference index interest or to measures of predicted volatility calculatedin the event the panel determines that: (i) publication of the using other methods. A strategy-based index may beunderlying index or reference index has been discontinued; calculated from the prices of multiple component securities(ii) the underlying index or reference index has been of different types, such as in the case of a buy-write indexreplaced by another index; or (iii) the composition or method measuring the return of a strategy that involves transactionsof calculation of an underlying index or reference index is so in stocks and options. The return from a particular strategymaterially changed since its selection as an underlying index as measured by a strategy-based index may differ from theor reference index that it is deemed to be a different index. A actual returns that an investor following that strategysuccessor index will be reasonably comparable to the achieves, because of assumptions regarding transactionsoriginal underlying index or reference index for which it and the failure to take into account significant factors suchsubstitutes. An index may be created specifically for the as taxes and transaction costs. Different relativepurpose of becoming a successor index. performance indexes may measure relative performance in

different ways. Investors should contact the listing optionsThe adjustment panel’s determinations shall bemarket for information on the method of calculation of aconclusive, binding on all investors, and not subject toparticular variability index, strategy-based index or relativereview.performance index.

13. The paragraph that was added immediately following13. Persons who exercise variability options,the caption ‘‘Special Risks of Index Options’’ on

strategy-based index options or relative performancepage 73 of the Booklet by the December 2009options or are assigned exercises based on an erroneousSupplement is replaced by the following:index level will ordinarily be required to make settlement

The risks described in paragraphs 1 through 10 on based on the exercise settlement value as initially reportedpages 73 through 78 of this booklet relate primarily to by the designated reporting authority for the index, even if aoptions on stock indexes. The risks described in corrected value is subsequently announced. Inparagraph 11 relate to options on implied volatility indexes. extraordinary circumstances (e.g., where an exerciseThe risks described in paragraphs 12 through 14 relate to settlement value as initially reported is obviously wrong, andoptions on variability indexes, strategy-based indexes or a corrected value is promptly announced), OCC hasrelative performance indexes. The risks described in discretion to direct that exercise settlements be based on aparagraph 15 relate to delayed start options. The risk corrected exercise settlement value. Ordinarily, however, thedescribed in paragraph 16 relates to dividend index options, exercise settlement value as initially reported by theand the risks described in paragraphs 17 relate to relative designated reporting authority for the underlying variabilityperformance options. index will be conclusive for exercise settlement purposes. As

described in paragraph 8. on page 77 with respect to otherindexes, reported levels of a variability index, strategy-basedindex or relative performance index may be based on

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non-current information. This may occur as a result of delaysor interruptions in the market for the reference security or thecomponent securities of the underlying index or thereference index (which are the same in the case of realized MARCH 2011variability indexes).

SUPPLEMENT14. As in the case of writers of other index options,writers of variability options, strategy-based index options orrelative performance options cannot provide in advance for

The February 1994 version of the booklet entitledtheir potential settlement obligations by acquiring theCharacteristics and Risks of Standardized Options (theunderlying interest. Offsetting the risk of writing a variability‘‘Booklet’’) is amended as provided below to accommodateoption, strategy-based index option or relative performance(i) options on any index intended to measure the impliedoption may be even more difficult than offsetting the risk ofvolatility of a single reference security; and (ii) options onwriting other index options. Even where some offsetting ofrelative performance indexes. risk is possible, there are timing risks and other risks

analogous to those discussed in paragraphs 3 and 4 on 1. The first full paragraph on page 2 of the Booklet, aspages 74 and 75 of the booklet whenever an investor amended by the May 2007, December 2009 and Mayattempts to employ strategies involving transactions in 2010 Supplements, is replaced by the following:variability options, strategy-based index options or relative

Each options market selects the underlying interestsperformance options and transactions in stocks or inon which options are traded on that market. Options areoptions, futures contracts or other investments related tocurrently available covering four types of underlyingstocks.interests: equity securities (which term includes ‘‘fund

15. The following paragraph is inserted on page 78 of the shares’’ described in Chapter III), indexes (including stock,Booklet immediately following the paragraph that was variability, strategy-based, dividend and relativeadded as paragraph 16 under the section captioned performance indexes), debt securities and credit events,‘‘Special Risks of Index Options’’ by the December and foreign currencies. Options on other types of underlying2009 Supplement: interests may become available in the future.17. In the event that one of the index components of a 2. The first three paragraphs on page 23 of the Booklet,

relative performance index is eliminated as a result of a under the caption ‘‘About Indexes,’’ as amended by thecash-out merger or other event, the reporting authority may December 2009 Supplement, are replaced by thecease to publish the value of the relative performance index following:and the market on which options on that relative

As referred to in this booklet, an index is a measure ofperformance index are traded may determine to acceleratethe prices or other attributes of a group of securities* orthe expiration date of the options (and, in the case ofother interests. Although indexes have been developed toEuropean-style options, their exercisability). In that case, thecover a variety of interests, such as stocks and other equityexercise settlement value of the options would become fixedsecurities, debt securities and foreign currencies, and evenbased upon the last published value for the underlyingto measure the cost of living, the following discussion relatesrelative performance index. As a result, all such options thatonly to (i) indexes on equity securities (which are calledare not in the money will become worthless and all that are instock indexes in this booklet), (ii) indexes intended tothe money will have no time value. Holders of anmeasure the implied volatility, or the realized variance orin-the-money option whose expiration date is acceleratedvolatility, of specified stock indexes or specified securitiesmust be prepared to exercise that option prior to the(which are collectively called variability indexes in thisaccelerated exercise cut-off time in order to prevent thebooklet), (iii) strategy-based indexes, such as indexesoption from expiring unexercised. Writers of a European-measuring the return of a particular strategy involving thestyle option whose expiration date is subject to beingcomponent securities of a stock index and options on thataccelerated bear the risk that, in the event of such anindex, (iv) indexes intended to measure the stock priceacceleration, they may be assigned an exercise notice andchanges of the component securities of underlying indexesbe required to perform their obligations as writers prior to thethat result solely from the distribution of ordinary cashoriginal expiration date. As with any other option for whichdividends, as calculated on their respective ex-dividendthe expiration date is accelerated, no adjustment would bedates (which are called dividend indexes in this booklet),made to compensate for the accelerated expiration date of a(v) relative performance indexes, which are a special typerelative performance option.of strategy-based indexes that measure the relative

* Some indexes reflect values of companies, rather thansecurities, by taking into account both the prices ofcomponent securities and the number of those securitiesoutstanding.

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JANUARY 2012SUPPLEMENT

The February 1994 version of the booklet entitledCharacteristics and Risks of Standardized Options (the‘‘Booklet’’) is amended as provided below to accommodateoptions on relative performance indexes of which the indexcomponents are equity securities (including fund shares).

1. The first paragraph following the caption ‘‘RelativePerformance Indexes,’’ which was added to Chapter IVof the Booklet by the March 2011 Supplementimmediately following the section captioned ‘‘Strategy-Based Indexes’’ (which was added on page 25 of theBooklet by the December 2009 Supplement), isreplaced by the following paragraphs:

A relative performance index measures the relativeperformance — generally the relative total return — of twoindex components. As of the date of this booklet, the onlyrelative performance options approved for trading areoptions on indexes of which both index components areequity securities (one or both of which could benon-leveraged fund shares). One of the components in eachpair is referred to as the target component and the second isreferred to as the benchmark component. The index iscalculated by measuring the total return of the targetcomponent relative to the total return of the benchmarkcomponent. The index will rise as and to the extent that thetarget component outperforms the benchmark component,and will fall as and to the extent that the opposite occurs. Thevalue of the relative performance index will be set to a basevalue, such as 100, initially. The following example illustratesthe calculation of a relative performance index.

EXAMPLE: Assume that a relative performance indexhas an initial base value of 100. If the total return of thetarget component in one day is 10% and the total returnof the benchmark component in the one day period is9%, the index value of the relative performance index atthe end of the one day period would equal100�(1�10%)/(1�9%)�100.92. If the total return ofthe target component in the one day period is 9% andthe total return of the benchmark component in the oneday period is 10%, the index value of the relativeperformance index at the end of the one day periodwould equal 100�(1�9%)/(1�10%)�99.09.

The example above illustrates only a scenariowhere the total return assumed is for a one dayperiod. Other periods would yield different results.Market participants should contact the exchange onwhich these options are traded for a more completedescription of the index calculation methodology.

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