Welcome to Options Trading: the unit where a securities trader learns the order vocabulary, the exercise machinery and the position and exercise ceilings that govern listed options.
Exam Weight: about 3 of the 50 scored items (CertFuel planning estimate; FINRA publishes weights only by function, and Function 1, Trading Activities, is 41 items / 82%)
What You'll Learn
In this unit, you'll cover:
- Option Order Types, Order Instructions and Times-in-Force: the two order types, the instruction families that condition handling, including the three session designations, and the eight durations the System recognizes
- Spreads, Straddles and Combinations: what a combination position is, what makes an order complex, the ratio tests that separate conforming from nonconforming, and the five named spread strategies
- Index Options, Including the Cboe Volatility Index: how an index option is defined and classified, and when a volatility index option settles, expires and stops trading
- Exercise and Assignment: the American-style and European-style exercise windows, the restrictions that can close them, and the fixed procedures a firm must use to allocate an assigned exercise notice
- Tender of Exercise Notices: who may tender to the clearing corporation, how exercise by exception works, and the contrary exercise advice and its cut-off times
- Position Limits: the contract limits, what gets aggregated, when accounts are treated as one, and every hedge, delta, market-maker and facilitation exemption
- Exercise Limits, Reports and Liquidation: the five-business-day exercise ceiling, the reporting triggers, and what happens when a position exceeds the limit
Why This Matters
Options are the one product family on this exam where a trader can breach a rule without ever mispricing a trade. Enter the wrong order instruction and the System handles the order in a way the customer did not ask for; miss a cut-off time and a contract the customer wanted abandoned is exercised anyway, or one that would not be automatically exercised is never tendered.
The unit is organized so each layer builds on the one before it:
- What the trader can send, and how long it lives
- What a multi-leg order has to look like to be handled electronically
- What happens at expiration, and who has to act by when
- How much of one class a firm and its customers may hold, and how much of it they may exercise
Position and exercise limits reward careful reading rather than memorization. The contract numbers repeat across the rules, so what separates a right answer from a wrong one is usually the aggregation test, the review timing or the exemption condition attached to them.
Let's start with the two order types every other instruction attaches to.