Certain Option Terms:

There are varied terms and concepts that relate to option activity.  Here are a few.  However, please keep in mind that the purpose of this post is to provide the reader with general information concerning just a few of them.  Thus, the purpose of this post is to provide the reader with general educational information concerning the below described terms and concepts.  Therefore remember that the information provided herein is not designed to be complete in all material respects and does not identify all option related terms that apply to option activity. Consequently, if you have any questions concerning its content, you should contact a qualified professional.

Option Account:  An option account is a special account that is established at a brokerage firm that allows the account owner to trade options in his or her account.  Since some option strategies require the use of margin, most “standard” option agreements require the owner of the account to establish a margin account with the firm.

Because of the fact that option trading can be highly speculative, there are special requirements that a brokerage firm must comply with prior to its opening of a margin account on behalf of one of its clients.  First, the client must be given a copy of “Characteristics and Risks of Standardized Options Contracts,” known as the Options Disclosure Document, before an account can be opened.  Secondly, the client must complete a separate account agreement, specifically labeled an “option agreement” to open an option account.  The purpose of this second agreement is that the client must prove, to the satisfaction of the firm’s option compliance professionals, that he or she is suitable for options transactions, both in financial resources and investment experience, before the firm will approve the account for option trading.

Just the process of opening an account should tell you that the opening of an option account should not be a perfunctory event, but something that you should pay attention to.  The risks relating to various types of option strategies is set forth in the Option Clearing Corporation booklet.  Please make sure that you read and understand the information contained therein before embarking on any type of option trading strategy.


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