Options accounts require additional steps beyond a standard brokerage account because options carry unique risks that the customer must understand before trading.
Account Opening Requirements
- A separate Options Account Agreement must be completed and approved
- The branch manager or a registered options principal (ROP) must approve the account in writing
- The customer must receive the Options Disclosure Document (ODD) at or before account approval
- Full title: "Characteristics and Risks of Standardized Options"
- Published by the Options Clearing Corporation (OCC)
Suitability Assessment
Account approval considers four key factors:
- Investment objectives - What is the customer trying to achieve?
- Financial situation - Can the customer afford potential losses?
- Trading experience - Has the customer traded options before?
- Understanding of options risks - Does the customer grasp the unique risks?
Exam Tip: Gotchas
All four suitability factors (objectives, financial situation, experience, and risk understanding) must be considered before approving an options account.
Trading Levels
- Options accounts use trading levels that restrict which strategies a customer is approved to use
- Lower levels cover the most conservative strategies (such as covered calls); higher levels add increasingly risky strategies, up to uncovered (naked) writing
- Customers must be approved for each level based on their experience and financial profile
- Levels are cumulative: approval at a higher level also permits all of the lower-level (more conservative) strategies
Exam Tip: Gotchas
Trading levels are cumulative: approval at a higher level includes all lower levels. The ODD must be delivered at or BEFORE account approval, not at the time of the first trade. Approval comes in writing from the branch manager or a registered options principal (ROP); if the branch manager holds no principal designation, an ROP must approve the account within 10 business days.