The Level 2 Account That Wasn't

Level 2 permits buying calls and puts. The 9 debit spreads are arguably within the spirit of long options (defined risk, debit only), but the correct treatment is to check the firm's written level definitions rather than assume - some firms break spreads into their own level. The 17 short strangles are unambiguously outside Level 2: they carry uncovered short legs and unlimited risk on the call side.

Immediate obligations:

1. Stop new activity in the account on the unapproved strategies and notify the rep in writing.
2. Assess the open positions. Uncovered short strangles in a single small-cap name are the firm's risk as well as the customer's. Obtain current mark-to-market, determine whether the customer can meet maintenance, and decide whether to require closing or to permit a defined-risk conversion (e.g., buying the wings) while a proper level upgrade is documented.
3. Upgrade properly or don't. A level change requires a fresh suitability determination signed by an ROP, not a clerical edit - and it cannot be applied retroactively to legitimize trades already done.
4. Treat the 17 tickets as unapproved trades and evaluate whether the rep exceeded authority systematically across other accounts; one rep with 17 out-of-level tickets rarely has exactly one such account.

Raw numbers alone don't decide it. Kessler has $1.2 million net worth and $230,000 income, so he is not a marginal candidate for options risk - but the account is $64,000, and the strangles sit inside that account. Concentration of 62% in one small-cap biotech means a single gap move can wipe out the account and leave the customer owing the firm.

Information needed: the actual strike and expiration ladder; total notional and maximum loss if the underlying gaps up 30%; whether the account holds marginable securities elsewhere; the customer's prior options experience at other firms; and documentary evidence - recorded calls, signed strategy acknowledgments, or email - showing he asked for short-premium exposure rather than vaguely "something different."

Defensible: an ROP-approved level upgrade supported by the customer's stated objective, documented risk discussion, position sizing that a reasonable person would accept, and evidence the customer understood unlimited call risk.

Indefensible: a one-line note on a ticket, no principal review, a 62% single-name concentration, and a 46% drawdown in one quarter with no supervisory intervention. On these facts the burden sits with the firm, not the customer.

"Not held" orders. Marking an order "not held" gives the desk time-and-price discretion, so the customer must have authorized it in advance and the firm must be able to evidence that authorization. Six such orders with nothing in the file means the firm cannot prove the discretion was granted. Remediation: stop accepting "not held" orders for this account, obtain written authorization going forward, and review the execution prices on the six tickets against the day's range to see whether the discretion was exercised against the customer. If it was, that is a suitability and possibly an unauthorized-trading matter, not a paperwork matter.

Missing principal initials. Where the firm's procedures require designated-principal review of short option orders, the absence of initials means either the review did not happen or it happened without record. Both are supervisory failures. Pull the order-entry timestamps and compare with the approval log.

Remediation plan: written finding to the rep; enhanced supervision (pre-approval of all opening orders) for a defined period; account-level review with the customer; a sampling of the rep's other accounts; and a documented fix in the supervisory control system so the next quarterly review catches out-of-level tickets automatically rather than by luck.