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
- 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 the customer can use
- Higher levels permit increasingly complex (and risky) strategies:
| Level | Typical Strategies Permitted |
|---|---|
| Level 1 | Covered calls, protective puts |
| Level 2 | Buying calls and puts |
| Level 3 | Spreads (vertical, horizontal, diagonal) |
| Level 4 | Naked (uncovered) writing |
- Customers must be approved for each level based on their experience and financial profile
- A customer approved for Level 3 can also use strategies from Levels 1 and 2
Exam Tip: Gotchas
Trading levels are cumulative: approval at a higher level includes all lower levels. A customer approved for spreads (Level 3) can also write covered calls (Level 1) and buy puts (Level 2). 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.