Key Takeaways
- Suitability assessment must consider customer's financial situation, investment experience, and objectives.
- Options strategies must match the customer's risk tolerance and sophistication level.
- Supervisors must review and approve suitability determinations made by representatives.
- Ongoing suitability monitoring is required as customer circumstances change.
- Special considerations apply to senior investors and those with limited experience.
Last updated: January 2026
Options Suitability Assessment
Suitability is one of the most critical supervisory responsibilities. You must ensure that options recommendations and account approvals are appropriate for each customer.
FINRA Suitability Rule Components
Under FINRA Rule 2111, there are three suitability obligations:
Three Suitability Obligations
| Type | Description | Application |
|---|---|---|
| Reasonable-Basis | Strategy must be suitable for at least some investors | Applies to all recommendations |
| Customer-Specific | Strategy must be suitable for this particular customer | Based on customer profile |
| Quantitative | Level of trading activity must be suitable | Excessive trading prohibited |
Suitability Factors for Options
Customer Profile Elements
| Factor | Considerations |
|---|---|
| Financial Status | Income, net worth, liquid assets |
| Tax Status | Tax bracket, need for tax-advantaged strategies |
| Investment Objectives | Speculation, income, hedging, growth |
| Time Horizon | Short-term vs. long-term goals |
| Risk Tolerance | Conservative, moderate, aggressive |
| Investment Experience | Prior options trading, market knowledge |
| Age | Retirement status, time to recover from losses |
Strategy-Specific Suitability
Different options strategies require different suitability considerations:
Conservative Strategies (Lower Risk)
| Strategy | Suitable For |
|---|---|
| Covered Calls | Income-oriented investors with stock positions |
| Protective Puts | Investors seeking downside protection |
| Cash-Secured Puts | Investors willing to buy stock at lower price |
Moderate Strategies (Medium Risk)
| Strategy | Suitable For |
|---|---|
| Long Calls | Bullish investors with risk capital |
| Long Puts | Bearish investors or hedgers |
| Spreads | Experienced investors seeking defined risk |
Aggressive Strategies (Higher Risk)
| Strategy | Suitable For |
|---|---|
| Uncovered Calls | Highly sophisticated, well-capitalized investors |
| Uncovered Puts | Experienced investors willing to buy stock |
| Complex Spreads | Very experienced options traders |
Supervisor Alert: Uncovered (naked) options writing has unlimited risk potential. Extra scrutiny is required before approving these strategies.
Red Flags in Suitability
Watch for these warning signs when reviewing options accounts:
Account-Level Red Flags
- Aggressive strategies for conservative stated objectives
- Trading level inconsistent with experience
- Concentration in a single underlying security
- Options trading in retirement accounts without documentation
Transaction-Level Red Flags
- Short-term trading with long-term objectives
- Excessive trading relative to account size
- Complex strategies for inexperienced customers
- Large positions relative to net worth
Supervisor Review Requirements
When to Conduct Enhanced Review
| Trigger | Action Required |
|---|---|
| New account approval | Full suitability assessment |
| Trading level upgrade | Re-evaluate customer profile |
| Unusual activity | Review for suitability concerns |
| Customer complaint | Investigate suitability of trades |
| Annual review | Verify continued suitability |
Test Your Knowledge
Which of the following strategies would generally be LEAST suitable for a retired customer with conservative investment objectives?
A
B
C
D
Test Your Knowledge
Under FINRA Rule 2111, customer-specific suitability requires that:
A
B
C
D