SEC Issues Investor Bulletin: Opening an Options Account

The SEC’s Office of Investor Education issued an investor bulletin to assist individuals in understanding what to expect when opening an options trading account with a broker-dealer.

Prior to trading options, the broker must approve the client’s brokerage account for options trading. In order to be approved for options trading, the client will need to complete the broker’s options agreement. In an options agreement, the client will provide information that will assist the broker in understanding the client’s knowledge of options and trading strategies, the client’s general investing knowledge and the client’s ability to bear the risks of options trading. Based on the information provided by the client, the broker will determine whether options trading is suitable, and if so, what type of options trading is appropriate.

The SEC identified the information that the client will need to provide in an options agreement to include:

  1. Investment Objectives such as capital preservation, income, growth, or speculation;
    2. Trading Experience;
    3. Personal Financial Information such as liquid net worth, total net worth, annual income and employment information; and
    4. The types of options an individual is interested in trading.

The information the client provides to the brokerage firms allows the firm to determine which option trading levels, if any, the client qualifies to trade in his or her account. The trading levels determine the types of options trades which may be executed in the client’s account. Broker-dealers typically offer 5 levels of option trading which represent varying degrees of risk. Level 1 often represents the lowest degree of risk, while level 5 generally represents the greatest level of risk. The types of options trading strategies and the level of risks varies between brokerage firms. Clients may request their brokerage firm to provide a list and description of each options trading level it makes available to its customers.

The SEC and FINRA rules require brokers to provide disclosures to all potential options investors. The disclosures contain basic information about the types of options and examples regarding risks associated with various options and options trading strategies. Individuals should read this information carefully before trading options.

If you have suffered investment losses as a result of your broker’s or advisor’s options trading strategy, please contact the Hanley Law to explore your legal rights. The Hanley Law is dedicated to helping investors who have been victims of securities and commodities fraud. If you have lost money as a result of options trading, you may be able to recover your financial losses. Contact us today toll free at (239) 649-0050 for a complimentary initial consultation.

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