Key Takeaways
- Options accounts require specific customer disclosures and approvals.
- The Options Disclosure Document (ODD) must be provided before or at account approval.
- Customers must complete an options agreement within 15 days of account approval.
- Supervisors must approve all new options accounts based on suitability assessment.
- Background and financial information must be verified and documented.
Options Account Opening Requirements
As a supervisor, you are responsible for ensuring that all options accounts are opened properly and that customers are suitable for options trading.
The Options Disclosure Document (ODD)
The Options Disclosure Document (ODD), officially titled "Characteristics and Risks of Standardized Options," is a critical disclosure that must be provided to all options customers.
ODD Delivery Requirements
| Timing | Requirement |
|---|---|
| When | At or before account approval |
| How | Physical copy or electronic delivery |
| Updates | Current version must be provided |
| Confirmation | Customer must acknowledge receipt |
Exam Tip: The ODD must be delivered at or before the time the account is approved for options trading—not after.
Options Account Agreement
After the account is approved, the customer must sign and return an options agreement within 15 calendar days.
Options Agreement Requirements
| Element | Description |
|---|---|
| Deadline | 15 calendar days after approval |
| Consequence | No new opening transactions if not returned |
| Closing allowed | Customer may still close existing positions |
| Supervisor action | Must follow up on missing agreements |
Customer Information Requirements
Before approving an options account, supervisors must obtain and verify:
Required Customer Information
| Category | Information Needed |
|---|---|
| Financial | Annual income, net worth, liquid net worth |
| Investment | Investment objectives, time horizon |
| Experience | Prior options trading experience |
| Employment | Occupation, employer information |
| Tax Status | Tax bracket, filing status |
Verification Procedures
- Review account application for completeness
- Verify consistency of information provided
- Document any discrepancies or concerns
- Obtain additional information if needed
Supervisor Approval Process
Steps for Account Approval
- Review application - Ensure all required information is complete
- Assess suitability - Evaluate customer's appropriateness for options
- Determine trading level - Assign appropriate options trading level
- Document approval - Sign and date the account approval
- Ensure ODD delivery - Confirm disclosure was provided
- Monitor agreement return - Track 15-day deadline
Trading Levels
Most firms use a tiered system for options trading authorization:
| Level | Permitted Strategies |
|---|---|
| Level 1 | Covered calls, protective puts |
| Level 2 | Long calls and puts |
| Level 3 | Spreads |
| Level 4 | Uncovered (naked) options |
| Level 5 | Index options, complex strategies |
Supervisor Responsibility: You must ensure that the assigned trading level matches the customer's experience, financial situation, and investment objectives.
When must the Options Disclosure Document (ODD) be delivered to a customer?
If a customer fails to return the signed options agreement within the required timeframe, what is the consequence?