The SEC’s Office of Investor Education is issuing this investor bulletin to help you to understand what to expect when opening an options trading account with your broker-dealer.
Before you can trade options, your broker must approve your brokerage account for options trading. In order to be approved for options trading, you will need to fill out your broker’s options agreement. In an options agreement, you will need to provide information that will assist your broker in determining your knowledge of options and trading strategies, as well as your general investing knowledge and your financial ability to bear the risks of options trading. Based on the information you provide, your broker will determine whether options trading is suitable for you and, if so, what types of options trading may occur in your account.
Information You Will Need to Provide
The information you will need to provide in an options agreement generally includes, among other things:
- Investment objectives such as capital preservation, income, growth, or speculation;
- Trading experience such as the number of years you have been trading stocks and/or options, the number of trades you make per year, the average size of each trade, and information about your general knowledge of investing;
- Personal financial information such as liquid net worth (investments easily sold for cash), total net worth, annual income, and employment information; and
- An indication of what types of options you would like to trade.
The information you provide in your options agreement allows your brokerage firm to determine which option trading levels, if any, you qualify for in your account. These trading levels determine the types of option trades you can execute in your account. Broker-dealers generally offer 5 levels of option trading representing varying degrees of risk. Level 1 generally represents the lowest level of risk, while level 5 generally represents the highest level of risk. The types of option trading that occurs at each level and even the number of levels may vary among brokerage firms. You may ask your brokerage firm to provide you with a list and description of each option trading level it has available for its customers.
Apart from the options agreement, SEC and FINRA rules require brokers to provide certain disclosures to all potential options investors. For example, your broker must provide you with a copy of a publication from the Options Clearing Corporation called “Characteristics and Risks of Standardized Options.” This publication contains basic information about the characteristics of options as well as detailed examples about the risks associated with various options and options trading strategies. Make sure you read this publication and carefully consider the information in it before you begin trading options. For additional information on some of the basics of options trading, you may also review the SEC’s investor bulletin “An Introduction to Options” located at /news-alerts/investor-bulletins/investor-bulletin-introduction-options.
This bulletin provides a general overview of the steps an investor must take to open an options trading account with his or her broker-dealer. For more specific details on how to open an options trading account, investors should contact their broker-dealer. For additional information on options and the options marketplace, investors should consider reviewing the following:
Options Clearing Council’s publication “Characteristics and Risks of Standardized Options” located at http://www.optionsclearing.com/about/publications/character-risks.jsp.
The Chicago Board of Options Exchange Education Center located at http://www.cboe.com/learncenter/
The NASDAQ Options Trading Guide located at http://www.nasdaq.com/investing/options-guide/
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.