Q:
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

A:

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.


RELATED FAQS

  1. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ...
  2. What's the difference between a credit spread and a debt spread?

    Learn about debit and credit option spread strategies, how these strategies are used, and the differences between debit spreads ...
  3. What is the difference between open interest and volume?

    Learn more about options, what options' volume and open interest are and the difference between volume and open interest ...
  4. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ...
  5. When does one sell a put option, and when does one sell a call option?

    The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. ...
  6. How do you trade put options on Ameritrade?

    Learn about option trading with TD Ameritrade. Explore the different types of options and their possible impacts on the investors ...
RELATED TERMS
  1. Registered Options Principal - ROP

    An employee at a brokerage firm that is responsible for supervising ...
  2. Writer

    The seller of an option who collects the premium payment from ...
  3. Uncovered Option

    A type of options contract that is not backed by an offsetting ...
  4. Writing An Option

    The expression "writing an option" refers to the act of selling ...
  5. Allocation Notice

    An official notification from an options clearing firm to the ...
  6. Short Leg

    Any contract in an option spread in which an individual holds ...
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center