Brokerage Option Accounts

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Brokerage Option Accounts

An option account is one in which the investor either purchases or sells one of two types of options. A call option grants the owner the right to buy 100 shares of a particular security at a pre-determined price. A put option grants the owner the right to sell 100 shares of a particular security at a pre-determined price. In other words, options traders are buying and selling future trading opportunities in stocks, rather than the actual stocks themselves.

Things To Know

  • Options traders buy and sell future trading opportunities in stocks, rather than the stocks themselves.
  • Options trading involves much risk.

Risks and requirements in option accounts

Because there is the potential for significant gains and losses, depending on the movement of the underlying stock, option trading involves significantly higher risk than traditional stocks and bonds. When opening a new option account, the registered representative must make every effort to determine whether this type of trading is suitable for the investor. Factors to be considered are the investor’s financial objectives, financial situation, and investment experience. Further, the registered representative asks the investor to sign and return an options disclosure agreement within 15 days of account approval. Among other things, this agreement states that the investor understands and will not knowingly violate the rules and position limits set forth in the agreement.