Supervising Sales Practices and General Options Trading Activities
What you supervise day to day
Supervision of options trading focuses on order handling (time-stamped tickets, accurate order entry, best execution), suitability and care obligations, exercise and assignment processing at expiration, position and exercise limits, and reporting of large options positions. Discretionary orders, cross trades, and principal trades with customers require specific written authorization and principal approval.
Expiration mechanics candidates must know
- Long options that expire in the money are typically exercised automatically under firm policy, often at a stated threshold such as $0.01. The customer must be told the policy in advance.
- Customers who want to avoid exercise must deliver do-not-exercise instructions before the firm's cutoff, which is earlier than the OCC's 5:30 p.m. ET deadline for exercise notices on expiration day.
- Short options that finish in the money are subject to assignment; the resulting stock position appears over the weekend with Monday gap risk ("pin risk" near the strike).
Traps
Assuming position limits and exercise limits differ meaningfully - they generally mirror. Assuming a customer escapes limits by spreading contracts across family or controlled accounts - aggregation applies. Assuming the firm may exercise a customer's option without any instruction beyond a disclosed automatic-exercise policy.
Worked example
A customer is short 5 XYZ January 40 calls. XYZ closes expiration Friday at 40.03. The rep says, "It's three cents, we're fine." Wrong: any close above 40 leaves the short calls in the money and subject to assignment. The supervisor's job is to confirm the rep warned the customer before expiration and that any instruction to close or offset reached the desk in time.