Setting Up An Account

Once you have selected your brokerage firm, all that remains to establish an account for options trading is completing the paperwork and depositing the assets required to open an account. The paperwork includes the following components.

Brokerage Account Application: Includes your vital information, including employment, bank accounts (optional), and net worth. Net worth, including liquid and total net worth, is required by the brokerage house as part of the "know your customer" guidelines of the National Association of Securities Dealers (NASD). The know your customer rules are designed to make sure that brokers do not place you into inappropriate investments at odds with your financial situation, goals, and knowledge. Some brokerage houses may have stricter net worth requirements if you indicate you plan to write naked options, because that strategy has the potential for theoretically unlimited losses.

Characteristics and Risks of Standardized Options: This booklet, published by the Options Clearing Corporation (OCC), is provided to all prospective options account holders. Usually you must affirm to your broker that you have read and understood the material contained in the booklet. The booklet gives a basic explanation of equity and index options, as well as the risks incurred in various types of positions.

Options Agreement/Application: To trade options in your brokerage account, all brokerage firms require you to complete a separate options agreement. It will ask for information regarding your investment experience and knowledge of various types of options trading strategies, as well the number of options trades you have initiated in the past. This is designed to help your broker determine if options trading is suitable for you and understand what types of trading may be most appropriate for you.

Deposit of Assets: Your broker will require a deposit in the form of cash or securities for you to make your first trade. Assets can be brought into an account in many forms, including check, wire transfer, electronic transfer, or a transfer of assets from another broker. Your particular brokerage house may have other paperwork requirements to establish an account for you. Additionally, specific types of accounts-such as trusts and retirement accounts (IRAs, for example) usually have their own regulatory requirements.