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Options Trading: The Question of Suitability

By  Apr 18, 2012

Topics: Finance & Investing

Anyone interested in trading options has to be qualified by their broker to trade. This demands a separate options agreement in which you have to state your experience and knowledge.

Here is the problem: Anyone can claim vast experience in options trading, whether they possess it or not. How can a broker check this out? The options agreement defines your claimed suitability, meaning number of trades you have executed, years of experience, knowledge level and the types of trades you plan to execute.

Another "qualifier" rarely mentioned by your broker is the amount of cash in your trading account. You need at least $5,000 to trade on margin, and options trading must be run through the margin account. However, brokers don't say so, but the level of approval often is made on the appropriate criteria as well as the amount of money you have to invest.

If you tell the broker on the agreement that you have many years of experience and that you intend to invest in very advanced strategies, the amount of money available might determine at least part of the decision about what level to assign you.

This is disturbing because the capital level is not a rational test of suitability. Even so, if you are willing to claim a lot of experience and you sign the form -- and if you have a lot of cash in your account -- you might be able to get approved for a level above your true capabilities.

The problem here is that you might end up taking risks you really don't intend to take. Before you apply for a level above your real experience, you should study options through books, blogs, and even training courses. You should also read cover to cover the risk disclosure document from the Options Clearing Corporation (OCC) called The Characteristics and Risks of Standardized Options, available for download at