Options Accounts

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 office manager, a registered options principal (ROP) or a Limited Principal-General Securities Sales Supervisor must approve or disapprove the account in writing
• If the branch office manager is neither an ROP nor a General Securities Sales Supervisor, the approval or disapproval must be submitted to one of those principals within 10 business days, and that principal approves or disapproves the account
• 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, an ROP or a General Securities Sales Supervisor. A branch manager who is neither kind of principal needs one of them to approve or disapprove the account within 10 business days.

What Should You Check on Exam Day?

• Can you state the four suitability factors considered when approving an options account?
• Do you know who must approve an options account in writing, and what happens within 10 business days when the branch manager is not a qualified options principal?
• Can you explain when the Options Disclosure Document must be delivered to the customer?
• Do you know why trading levels are described as cumulative?
• Can you state the full title of the Options Disclosure Document and who publishes it?