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Suitability Part 4: The Option Agreement and Client Background



The Option Agreement

Due diligence is exercised when a broker informs a client of the risks involved in options trading and obtains specific information about the clients financial condition, investment experience and financial goals. Only after this information is evaluated can a determination be made as to whether options trading is suitable for a client. It is also a requirement that, prior to an account being opened, the firm must supply to the client the latest copy of “Characteristics and Risks of Standardized Options,” which is also known as “The Options Disclosure Document” or “ODD.”

Client Background

SRO rules specify the minimum amount of background and financial information that must be obtained before a client is approved for options trading. The firm must request the following information:

  • Age
  • Employment status
  • Estimated annual income (all sources)
  • Estimated net worth (not including residence)
  • Estimated liquid net worth
  • Investment experience and knowledge
  • Investment objectives
  • Marital status and number of dependants

When applicable, customer account records must have the following information:

  • Source or sources of background and financial information, including the basis of any estimates made by you or the firm.
  • The nature and types of transactions for which the account is approved (buying, writing covered options, uncovered writing, spreads, etc.)
  • Whether the account is discretionary. If the customer has granted discretionary trading authority to any person, a written agreement must be on file and the account records must show the name, relationship to the customer, and the experience of the person holding the discretionary authority.
  • The date the ODD was furnished to the customer.
  • The name of the registered representative handling the account.
  • The name of the ROP approving the account and the date of approval.

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