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Advisor Knowledge Center

Suitability Part 3: Different Levels of Options-Trading Approval

Customers can be approved for different levels of options trading. Each level involves strategies with different amounts of risk, and approval for each level involves different financial requirements and experience.

Although different firms have different criteria for dividing option strategies into different levels, the option strategies with the lowest level of risk and which require the lowest level of financial requirements and experience are typically buying calls, buying puts and selling covered calls.

A higher level of risk, which requires additional client financial requirements and experience beyond those in the lowest level above are writing uncovered (or naked) puts, and trading spreads, which is typically defined as one-to-one spreads in which short options exist on a one-to-one basis with long options of the same type and with the same underlying.

An even higher level of risk, which requires even more client financial requirements and experience beyond those in the second level above are writing covered (or naked) calls and trading spreads with American-style index options.

As mentioned earlier, if a customer has an existing account for securities, it must be re-evaluated and specifically approved for options transactions prior to accepting customer option orders. Likewise, it is necessary to re-evaluate an options account for approval at a higher level of option trading. The exact requirements and allowable strategies for each level of options trading vary from firm to firm.

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