Question of the Week

When a registered representative opens a new options account for a client, the account must be approved by a Registered Options Principal (ROP) prior to any options positions being opened. Which of the following strategies, that the customer may initiate, would entail the greatest scrutiny of the account by the ROP?

a) Writing uncovered calls
b) Establishing bear put spreads
c) Opening long combinations
d) Establishing debit call spreads


Answer:

The correct answer is a.

The riskiest of all options positions is writing uncovered—or naked—calls, because the writer is subject to unlimited losses. The ROP who approves this strategy would only do so after extensive scrutiny of the client’s financial condition and ability to withstand the risk. All the other choices are positions in which the most that the investor can lose is the premium invested.