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
- A registered options principal (ROP) must approve the account; not just any supervisor
- 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. The account must be approved by a registered options principal (ROP), which is a specific designation, not just any branch manager.