Options Account Approval and Regulations
The final piece of options fundamentals is the regulatory framework. Before any customer can trade options, specific procedures must be followed. The exam tests the exact requirements, timelines, and consequences of non-compliance under FINRA Rule 2360.
Opening an Options Account (FINRA Rule 2360)
Before approving an options account, the firm must complete a specific sequence:
- Obtain background and financial information from the customer:
- Investment objectives
- Investment experience
- Annual income and net worth
- Liquid assets
- Deliver the Options Disclosure Document (ODD) at or before the time the account is approved
- Have a Registered Options Principal (ROP) approve the account in writing
The 15-Day Rule
- The customer must return the signed options agreement within 15 days of account approval
- If the agreement is not returned within 15 days, the account is restricted to closing transactions only (no new positions can be opened)
- The account is not frozen and not liquidated; it is just restricted to closing
Exam Tip: Gotchas
- The customer has 15 days to return the signed options agreement AFTER the account is approved. If not returned in time, the account is limited to closing transactions only (not liquidated, not frozen, just restricted).
- ODD must be delivered at or before account approval (not after).
Suitability and Approval Levels
Options recommendations are subject to FINRA Regulation Best Interest (Reg BI) and suitability standards. The firm must assess whether the customer has sufficient knowledge and financial resources for the strategies being considered.
Customer accounts are typically approved at one of several levels (tiers), with each level permitting progressively riskier strategies:
| Level | Permitted Strategies |
|---|---|
| Level 1 | Covered calls, protective puts |
| Level 2 | Long calls and long puts |
| Level 3 | Spreads |
| Level 4 | Uncovered (naked) writing |
- The ROP must review and approve each level of authorization
- A customer approved for Level 3 can also execute Level 1 and Level 2 strategies
- Naked writing (Level 4) carries the highest risk and requires the most financial resources
Exam Tip: Gotchas
- Approval levels are progressive. A customer approved for Level 3 can also execute Level 1 and Level 2 strategies.
- Level 4 (naked writing) requires the most scrutiny because potential losses are theoretically unlimited.
Options Communications (FINRA Rule 2220)
The rules distinguish between communications sent before and after the customer receives the ODD:
Pre-ODD Communications
- Must be filed with FINRA at least 10 calendar days before use
- Permitted content: General descriptions of options, descriptions of exchanges and clearing agencies, contact information for obtaining the ODD
- Prohibited content: Recommendations, past or projected performance, names of specific securities
Post-ODD Communications
- Subject to the general content standards of FINRA Rule 2210 (the standard communications rule)
- More flexibility in content since the customer has already received the risk disclosures
Exam Tip: Gotchas
- Pre-ODD communications cannot include recommendations, performance data, or specific security names. They must be filed with FINRA 10 calendar days before use.
- Post-ODD communications follow standard FINRA Rule 2210 (the general communications rule), not the stricter pre-ODD requirements.