8.6 Options Account Requirements
Key Takeaways
The ODD must be delivered at or before options account approval.
Under FINRA Rule 2360 the signed options agreement is due within 15 days of approval.
In the agreement the customer agrees to follow FINRA and OCC options rules and to stay within position and exercise limits.
The OCC issues, guarantees, and randomly assigns all listed options.
Long options must be paid in full; naked writing needs the highest approval and margin.
Opening an Options Account (FINRA Rule 2360)
The exam tests the exact sequence and timing for approving an options account.
Step 1 — Deliver the ODD
The Options Disclosure Document (ODD), formally titled Characteristics and Risks of Standardized Options, must reach the customer at or before account approval.
- Published by the Options Clearing Corporation (OCC).
- Explains option mechanics, strategies, and risks.
- Must be the current edition; amendments are sent when the OCC revises it.
Step 2 — Principal Approval
A qualified principal (the branch office manager, a Registered Options Principal (ROP) or a General Securities Sales Supervisor) must approve the account in writing before any options trade occurs, based on due diligence about the customer. If the branch office manager is neither an ROP nor a General Securities Sales Supervisor, the approval goes to one of them within 10 business days. The review covers:
| Factor | What is evaluated |
|---|---|
| Financial status | Income, net worth, liquid net worth |
| Experience | Years trading, instruments used |
| Objectives | Income, growth, speculation |
| Risk tolerance | Conservative to aggressive |
Step 3 — Signed Options Agreement
Under FINRA Rule 2360, the firm must obtain the customer's signed options agreement within 15 days of account approval. In it, the customer agrees to be bound by FINRA and OCC options rules, confirms receipt of the current ODD and agrees not to violate position or exercise limits.
Exam alert: Order and timing matter: ODD at or before approval; a qualified principal approves before trading; agreement back within 15 days. The 15-day rule is a perennial test item.
Trading Levels
Broker-dealers assign tiered approval levels matching strategy risk to the client's profile; higher levels include all lower-level privileges.
| Level | Permitted strategies |
|---|---|
| 1 | Covered calls, protective puts |
| 2 | Long calls and puts |
| 3 | Spreads (debit and credit) |
| 4 | Uncovered (naked) puts |
| 5 | Uncovered (naked) calls |
Important: Naked call writing carries unlimited risk and demands the highest approval level and the largest margin.
The Options Clearing Corporation (OCC)
The OCC is the central clearinghouse and guarantor for every listed option in the United States.
| Function | Description |
|---|---|
| Issuer | Issues all standardized contracts |
| Guarantor | Guarantees performance, eliminating counterparty risk |
| Assignment | Randomly assigns exercise notices to short positions |
| Settlement | Clears and settles all options trades |
Exercise and assignment
- A holder submits an exercise notice (a broker accepts final instructions until 5:30 PM ET on expiration day).
- The OCC selects a writer at random on the same series.
- The assigned writer must perform — deliver shares (call) or buy shares (put).
Exam tip: The OCC assigns exercise notices at random; each firm then allocates them to its customers' short positions on a first-in, first-out or random basis, and must tell customers in writing which method it uses (FINRA Rule 2360). American-style writers can be assigned any time before expiration; European-style (most index) writers only at expiration.
Position and Exercise Limits
FINRA and the exchanges cap how many contracts an investor may hold or exercise on the same side of the market:
- Same side, bullish: long calls + short puts.
- Same side, bearish: long puts + short calls.
- Position limits cap total open contracts; exercise limits cap contracts exercisable over five consecutive business days. Caps scale with the underlying's trading volume and float.
Margin Requirements
| Position | Requirement |
|---|---|
| Long options | Paid in full — options cannot be bought on margin |
| Covered call | Underlying stock held in the account; no extra margin |
| Cash-secured put | Cash equal to strike x 100 set aside |
| Naked (uncovered) call/put | A formula amount: roughly 20% of the underlying + premium − any out-of-the-money amount, subject to a minimum |
Exam alert: Long options are never marginable because they expire and have no loan value at maturity — the buyer must pay 100% of the premium.
Options Taxation
Long options
| Outcome | Tax treatment |
|---|---|
| Sold at a gain/loss | Capital gain or loss (term by holding period) |
| Expires worthless | Capital loss recognized on the expiration date |
| Call exercised | Premium added to the stock's cost basis |
| Put exercised | Premium reduces the proceeds of the stock sale |
Short options
| Outcome | Tax treatment |
|---|---|
| Expires worthless | Short-term capital gain equal to premium received |
| Bought to close | Gain/loss = premium received − closing cost |
| Assigned | Adjusts the related stock's basis or proceeds |
Key rule: A standalone option's gain or loss is almost always short-term unless it is exercised and folded into the stock's holding period.
Customer Confirmations
Each options transaction generates a confirmation showing the type (call/put), underlying, strike, expiration, number of contracts, premium, whether the trade is opening or closing, and commissions/fees.
Account-Opening Timeline Recap
| Event | Timing rule |
|---|---|
| Deliver ODD | At or before account approval |
| Principal approval (branch manager, ROP or GS sales supervisor) | Before any options trade |
| Signed options agreement | Within 15 days of approval (FINRA Rule 2360) |
Common trap: Do not confuse the ODD (delivered at or before approval) with the options agreement (returned within 15 days). The exam frequently swaps these two timing rules in distractors. Also note that the approval must come from a qualified principal (the branch office manager, a Registered Options Principal or a General Securities Sales Supervisor) and must precede the very first trade, not merely the first deposit.
The Options Disclosure Document (ODD) must be provided to a customer:
Within 15 days of account approval
At or before account approval
Within 3 business days of the first trade
Only upon customer request
A customer's account is approved for options trading on May 1. Under FINRA Rule 2360, by when must the firm obtain the customer's signed options agreement?
Before the account is approved
By May 16 (within 15 days)
By May 31 (within 30 days)
By May 8 (within 7 days)
Which organization issues, guarantees, and randomly assigns all listed options contracts?
FINRA
The SEC
The CBOE
The Options Clearing Corporation (OCC)
Which options strategy requires the highest account approval level?
Covered call writing
Long put purchases
Credit spreads
Uncovered call writing
Sections you finish are checked off in the contents.