The final piece of the options puzzle is regulatory: what must happen before a customer can trade options? The SIE tests specific timing rules and document requirements.
What Is the ODD?
- Officially titled "Characteristics and Risks of Standardized Options"
- A comprehensive document that describes the mechanics, risks, and tax implications of options trading
- Prepared by the OCC (Options Clearing Corporation)
- Required to be delivered to every options customer
Exam Tip: Gotchas
- The ODD is prepared by the OCC, not by FINRA or the broker-dealer. The firm delivers it, but the OCC creates and maintains it.
Delivery Requirement
- The ODD must be delivered to the customer at or before the time the account is approved for options trading
- This is a regulatory requirement
- The customer cannot be approved without receiving the ODD
- If the ODD is updated or supplemented, firms must distribute the supplement to existing options customers
Options Account Approval Process
Opening an options account follows a specific sequence:
| Step | Action | Timing |
|---|---|---|
| 1 | Customer completes options account application | Before approval |
| 2 | Branch manager or Registered Options Principal (ROP) reviews and approves the account in writing | After application |
| 3 | ODD delivered to the customer | At or before approval |
| 4 | Customer signs the options agreement | Within 15 days after approval |
| 5 | Customer may begin trading | After approval (before agreement is returned) |
Key Timing Rules
- ODD delivery: At or before account approval; no exceptions
- Options agreement: Customer has 15 days after approval to sign and return it
- Trading: Customer CAN begin trading after approval, even before the signed agreement is returned
The Options Agreement
- A written agreement confirming the customer:
- Is aware of the rules applicable to options trading
- Agrees to be bound by those rules
- Has received the current ODD
- Must be returned within 15 days of account approval
- If it is not returned within 15 days, the account is restricted to closing transactions only until it is received
Exam Tip: Gotchas
- The customer CAN trade before returning the signed options agreement. They have 15 days to return it. But the ODD must be delivered at or before account approval.
- The ODD cannot be delivered after approval. The exam tests whether trading can begin before the agreement is signed (yes) and whether the ODD can be delivered after approval (no).
Registered Options Principal (ROP)
- A specially qualified supervisor who approves options accounts
- Reviews the customer's financial situation, investment objectives, and experience
- Determines appropriate options trading levels for the customer
- The branch manager may also give the written approval; if that manager holds no principal designation, an ROP must approve the account within 10 business days
Exam Tip: Gotchas
- The account must be approved in writing before the customer trades. The branch manager or a Registered Options Principal (ROP) gives that approval; a registered representative never can.