Series 9 key terms

A booklet published by the Options Clearing Corporation explaining how standardized options work and the risks involved. Firms must give it to a customer at or before the time the customer's account is approved for options trading, and provide updated copies as required.

A signed customer agreement, separate from the ordinary cash or margin account agreement, in which the customer acknowledges the risks of options trading and agrees to follow exchange and clearing rules on exercise and assignment.

The written decision by a designated supervisor, such as a Registered Options Principal or a qualified Series 9 supervisor, that a customer may trade options at specific levels after reviewing the application, financial information and investment objectives.

The reasonable-grounds judgment that a particular options recommendation or trading level fits the customer's financial situation, investment objectives, experience and risk tolerance, as required by FINRA rules and the options rules.

An account in which the representative may choose the option, price or timing of trades without the customer's approval of each order. It requires prior written customer authorization and written acceptance by a designated principal.

A written power of attorney letting someone other than the account holder, such as an adviser or relative, place options orders. A principal must review and approve it before any trading occurs.

Selling a call while holding the underlying shares or an equivalent long call, so the delivery obligation can be met from existing holdings. The position's risk is generally limited to a decline in the shares' value.

Selling an option without owning the underlying security or an offsetting position. Risk is theoretically unlimited for calls and substantial for puts, so firms impose higher approval levels and margin requirements.

The cash or equity a customer must deposit when an options position is opened. Listed long options with nine months or less to expiration are generally paid for in full; short positions must meet margin rules.

The minimum equity a customer must keep in a margin account after an option position is established. If equity falls below the requirement, the firm issues a margin call for additional funds.

The holder's decision to use an option contract, buying (for calls) or selling (for puts) the underlying at the strike price on or before expiration. Exercise causes a short holder somewhere to be assigned.

The process by which the Options Clearing Corporation allocates an exercised contract to a clearing firm, which then selects a customer holding a short position who must fulfill the contract's obligation.

The point after which an option can no longer be exercised. For standard U.S. equity options, trading ends on the third Friday of the expiration month and the contract expires the following Saturday.

The maximum number of option contracts on the same side of the market for a given underlying that one person or account group may hold, set by exchanges and FINRA to prevent excessive concentration.

The maximum number of contracts on the same underlying that one person or account group may exercise within any five consecutive business days, intended to prevent manipulation of the underlying security.

The total strike value of an options position, equal to the strike price multiplied by the number of contracts and the multiplier. It is used when applying position and exercise limits for certain products.

An options position combining a long and a short option of the same type on the same underlying but with different strike prices or expirations. Risk and margin are usually lower than for a single short option.

Holding a long or short call and put on the same underlying with the same strike price and expiration. A short straddle carries large risk and is margined on the greater of the two sides.

A trade that establishes a new options position, whether by buying or selling, as distinguished from a trade that reduces or eliminates a position the customer already holds.

A trade that offsets an existing options position and extinguishes the right or obligation. It must involve the same series and be on the opposite side of the original trade.

The duty to seek the most favorable terms reasonably available for customer orders under current market conditions, weighing price, speed, likelihood of execution and other factors. It applies to options as well as equities.

The main FINRA rule on options trading, addressing account approval, suitability, position and exercise limits, margin, communications and recordkeeping obligations of member firms and their associated persons.

Written or electronic material distributed to more than 25 retail investors within any 30-day period, such as a brochure, website or mass email. It requires principal approval before first use.

Written or electronic communication sent to 25 or fewer retail investors within any 30-day period. It must be reviewed by a qualified supervisor and retained, but does not need pre-approval before it is sent.

Material distributed only to institutional investors such as banks, insurers and registered investment companies. It is exempt from pre-approval and filing requirements but must still be fair and not misleading.

The requirement that a registered principal review and approve options sales literature and other retail communications before first use, confirming the material is fair, balanced and includes required risk disclosures.

The statement in options sales material that options involve risk, are not suitable for every investor, and that investors should read the Options Disclosure Document before trading. It is essential to fair and balanced presentation.

A disclaimer stating that the information in a communication is not a recommendation and that the firm does not guarantee its accuracy. It cannot be used to excuse misleading or unbalanced statements.

Firms must file certain retail communications about options with FINRA's Advertising Regulation Department within 10 business days of first use, unless a specific filing exemption applies to the material.

The uniform application used to register associated persons with FINRA and state regulators, disclosing employment history and reportable events such as criminal, civil or disciplinary matters.

The uniform termination notice a firm must file within 30 days after an associated person's registration ends, stating the reason for termination and disclosing any reportable conduct.

A condition, such as certain criminal convictions or a regulatory bar, that makes a person ineligible for registration or association with a member firm unless FINRA approves a disqualification exception.

Any business activity outside the member firm that provides compensation or could be viewed as part of the firm's business. It must be disclosed in writing and the firm must approve or deny it.

Selling or soliciting securities outside the firm, or participating for compensation in such a transaction. Written notice to the firm is required, and the firm may approve, disapprove or require the person to act as its employee.

The continuing education component administered by FINRA that registered persons must complete on the required recurring schedule to keep their registration active, covering regulatory and compliance topics.

The firm's own annual training program for registered persons, tailored to its lines of business and required by FINRA rules. Delivery and content must be documented in the firm's records.

The firm's written policies and procedures reasonably designed to achieve compliance with securities laws and FINRA rules, including options-specific supervisory steps and the principals responsible for each step.

A periodic on-site review of a branch's books, records and practices, with written findings. Offices that supervise fewer than three representatives must generally be inspected at least every three years.