Options Account Requirements

The Series 7 exam tests your knowledge of the regulatory requirements for opening and maintaining options accounts.

Opening an Options Account

Step 1: Options Disclosure Document (ODD)

The Characteristics and Risks of Standardized Options (ODD) must be provided at or before account approval.

• Published by the Options Clearing Corporation (OCC)
• Describes option strategies, risks, and mechanics
• Must be current edition
• Customer must receive before trading begins

Step 2: Options Agreement

The customer must sign and return the Options Agreement within 15 days of account approval.

If not returned within 15 days:

• No new positions may be opened
• Existing positions may be closed or exercised

Step 3: Account Approval

A Registered Options Principal (ROP) must approve the account based on:

Exam Alert: The ROP must approve the account BEFORE any options trades can occur. The ODD must be delivered at or before approval.

Account Trading Levels

Broker-dealers assign trading levels based on customer experience and suitability:

Higher levels include all strategies from lower levels.

Important: Naked call writing (Level 5) has unlimited risk and requires the highest approval level and margin requirements.

The Options Clearing Corporation (OCC)

The OCC is the central clearinghouse for all listed options in the United States.

OCC Functions

Exercise and Assignment

When an option holder exercises:

1. The OCC receives the exercise notice
2. OCC randomly assigns to a short position (writer)
3. The assigned writer must fulfill their obligation

Exam Tip: Exercise assignment is RANDOM. A writer can be assigned at any time before expiration (for American-style options).

Position and Exercise Limits

FINRA and exchanges set limits on the number of contracts an investor can hold or exercise:

• Position Limits: Maximum contracts on the same side of the market
• Exercise Limits: Maximum contracts exercisable in a 5-day period
• Same side: Long calls + short puts (bullish) OR long puts + short calls (bearish)

Limits vary by underlying security based on trading volume and float.

Margin Requirements

Options trades have specific margin requirements:

Premium Payments

• Long options: Must be paid in full (cannot be purchased on margin)
• Short options: Require margin deposit as collateral

Covered vs. Uncovered Writing

Options Taxation

Long Options

Short Options

Key Rule: Option holding periods are always short-term for tax purposes unless exercised and combined with stock holding period.

Customer Confirmations

For each options transaction, the customer must receive a confirmation showing:

• Type of option (call/put)
• Underlying security
• Strike price and expiration
• Number of contracts
• Premium
• Whether opening or closing transaction
• Commission and fees