Using stock you already own or buy new shares , you sell someone else a call option that grants the buyer the right to buy your stock at a specified price. But that might really translate to Unfortunately most reviews out there are good ones, which can only explain that people are lying. This standard recognizes that a supervisory system cannot guarantee firm-wide compliance with all laws and regulations. Reliable customer service should be a high priority, particularly for newer options traders. Although such holdings continue to act as precedent regarding those issues, the new rule does not broaden the scope of implicit recommendations. Some investments are safer than others, but all carry risk.
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1. Day Trading
A calendar spread strategy involves the investor establishing a position. This is done by the trader simultaneously getting into a long and short position on the same asset, but with varying delivery months. The primary idea behind this strategy is that as expiration dates get closer, time decay is evidenced more quickly. The point is once the investor shorts the front-month option, he or she has an evaporating time premium.
The time premium evaporates faster than the decay time in the out option. Just as in the call and put spreads, the investor is technically paying for the spread. The more out of time he or she goes, the bigger the payment is.
In calendar spreads, the further out of time the investor goes the more volatility the spread is. In case the investor picks an at the money strike, the underlying asset will have to lie around the strike for this technique to work. If the investor selects an out of the money strike and a high spread, the underlying asset has to go up.
Moreover, traders picking an in the money strike hope that the underlying asset will go down. Also check out our Top 7 Options Trading Strategies. John Thomas, the voice of Diary of a Mad Hedge Fund Trader, is a trading veteran who offers subscriptions to his trade alerts, cueing subscribers when to buy or sell which stock. This is a great opportunity to learn from the best and profit from it.
Your email address will not be published. Tom is a former accountant turned entrepreneur. He is not a financial adviser but does tend to give a lot of financial advice to his friends and colleagues. He currently runs a small online venture and blogs about his research and experiences. Safe Option Strategies The primary idea behind options lies in the strategic use of leverage. Covered call The covered call strategy is also called a buy-write.
Bull and bear spreads Bull call and bear put spreads are commonly known as vertical spreads. Bull Call Spread Explained Calendar spreads A calendar spread strategy involves the investor establishing a position. This document consolidates the questions and answers in Regulatory Notices , and , organized by topic.
New FAQs will be identified when added. FINRA Rule requires, in part, that a broker-dealer or associated person "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer's investment profile.
The rule also explicitly covers recommended investment strategies involving securities, including recommendations to "hold" securities. The rule, moreover, identifies the three main suitability obligations: Finally, the rule provides a modified institutional-customer exemption. The suitability rule applies only to recommended securities and investment strategies involving securities, but FINRA does not define the term "recommendation" other than to say that it is a facts and circumstances inquiry.
What factors determine whether a recommendation has been made for purposes of the suitability rule? Although FINRA does not define the term "recommendation," it has offered several guiding principles that firms and brokers should consider when determining whether particular communications could be viewed as recommendations. FINRA has extensively addressed those guiding principles in past Regulatory Notices, and cases have applied them to specific facts.
FINRA has stated that the new suitability rule does not broaden the scope of implicit recommendations applicable to the predecessor rule.
What are the conditions under which an implicit recommendation can trigger the suitability rule? FINRA and the SEC have held, for example, that brokers who effect transactions on a customer's behalf without informing the customer have implicitly recommended those transactions, thereby triggering application of the suitability rule. The new rule, for example, does not apply to implicit recommendations to hold a security or securities. Thus, the new rule's "hold" language would not apply when a broker remains silent regarding security positions in an account.
The hold recommendation must be explicit. Customers sometimes ask broker-dealer call centers whether they may continue to maintain their investments at the firm if, for instance, they want to move from an employer-sponsored retirement account held at the firm to an individual retirement account held at the firm. If a firm's call center informs customers that they are permitted to continue to maintain their investments at the firm under such circumstances, would FINRA consider those communications to be "hold" recommendations triggering application of the new suitability rule?
In general, FINRA would not view those communications as "hold" recommendations for purposes of the rule because the firm's call center is not responding to the question of whether the customer should hold the securities, but rather whether the customer can continue to maintain them at the firm.
Does the elimination of the general solicitation prohibition mean that broker-dealers no longer have suitability obligations regarding private placements? The JOBS Act removes certain marketing impediments but not a broker-dealer's suitability obligations.
In that regard, and as explained above in the answer to [FAQ 1. What constitutes a "customer" for purposes of the suitability rule? The suitability rule applies to a broker-dealer's or registered representative's recommendation of a security or investment strategy involving a security to a "customer. Does the suitability rule apply when a broker-dealer or registered representative makes a recommendation to a potential investor?
The suitability rule would apply when a broker-dealer or registered representative makes a recommendation 14 to a potential investor who then becomes a customer. Where, for example, a registered representative makes a recommendation to purchase a security to a potential investor , the suitability rule would apply to the recommendation if that individual executes the transaction through the broker-dealer with which the registered representative is associated or the broker-dealer receives or will receive, directly or indirectly, compensation as a result of the recommended transaction.
Does a firm have to update all customer-account documentation by the suitability rule's implementation date to capture the new "customer investment profile" factors age, investment experience, time horizon, liquidity needs and risk tolerance that were added to the existing list other holdings, financial situation and needs, tax status and investment objectives?
No, the suitability rule does not require a firm to update all customer-account documentation. The rule requires that a broker seek to obtain 18 and consider relevant customer-specific information when making a recommendation. Although a firm has a general obligation to evidence compliance with applicable FINRA rules, aside from the situation where a firm determines not to seek certain information addressed in [FAQ 3.
For example, the recommendation of a large-cap, value-oriented equity security generally would not require written documentation as to the recommendation. Compliance with suitability obligations does not necessarily turn on documentation of the basis for the recommendation.
However, firms should understand that, to the degree that the basis for suitability is not evident from the recommendation itself, FINRA examination and enforcement concerns will rise with the lack of documentary evidence for the recommendation. In addition, documentation by itself does not cure an otherwise unsuitable recommendation. Does a broker-dealer have to seek to obtain all of the customer-specific factors listed in the new rule by the rule's implementation date?
The rule generally requires a broker-dealer to seek to obtain and analyze the customer-specific factors listed in the rule when making a recommendation to a customer. Accordingly, a broker-dealer could choose to seek to obtain and analyze the customer-specific factors listed in Rule when it makes new recommendations to customers regardless of whether they are new or existing customers. What if a customer refuses to provide certain customer-specific information?
Some customers may be reluctant to provide certain types of information to their broker-dealers. A customer, for example, may not want to divulge information about "other investments" held away from the broker-dealer in question.
The suitability rule generally requires broker-dealers to use reasonable diligence to seek to obtain and analyze the customer-specific factors listed in the rule.
A broker-dealer cannot make assumptions about customer-specific factors for which the customer declines to provide information. The significance of specific types of customer information will depend on the facts and circumstances of the particular case. Would a firm violate the suitability rule if it makes recommendations to customers for whom it has not obtained all of the customer-specific information listed in FINRA Rule a?
The essential requirement of this provision is that the member firm or associated person exercise "reasonable diligence" to ascertain the customer's investment profile. In most instances, asking a customer for the information would constitute reasonable diligence. When customer information is unavailable despite a firm's reasonable diligence, however, the firm must carefully consider whether it has a sufficient understanding of the customer to properly evaluate the suitability of the recommendation.
While the rule lists some of the aspects of a typical investment profile, not every factor may be relevant to all situations.
For example, a firm may conclude that age is irrelevant regarding all customers that are entities or liquidity needs are irrelevant regarding all customers for whom only liquid securities will be recommended. The absence of some customer information that is not material under the circumstances generally should not affect a firm's ability to make a recommendation. To meet its suitability obligations, a firm must obtain and analyze enough customer information to have a reasonable basis to believe the recommendation is suitable.
The significance of specific types of customer information generally will depend on the facts and circumstances of the particular case, including the nature and characteristics of the product or strategy at issue.
What constitutes "reasonable diligence" in attempting to obtain the customer-specific information? Although the reasonableness of the effort will depend on the facts and circumstances, asking a customer for the information ordinarily will suffice. Moreover, absent "red flags" indicating that such information is inaccurate or that the customer is unclear about the information, a broker generally may rely on the customer's responses.
A broker may not be able to rely exclusively on a customer's responses in situations such as the following:. In addition to using reasonable diligence to obtain and analyze certain specific factors about the customer, the new suitability rule requires a broker to consider "any other information the customer may disclose" in connection with the recommendation.
How much of a duty does a firm have to pursue "any other information the customer may disclose" to see if it has suitability implications? Does the firm have a duty, for example, to ask its customers if there is anything else it should know about them when collecting information for suitability purposes? Where a customer discloses information to a broker in connection with the recommendation, the broker must consider that information as part of the suitability analysis.
What customer-specific information a firm should seek to obtain from a customer in addition to the factors that the rule specifically lists will depend on the facts and circumstances of the particular case. Although a firm is not required to affirmatively ask customers if there is anything else it should know about them, the better practice is to attempt to gain as much relevant information as possible before making recommendations.
How does FINRA define the terms "liquidity needs," "time horizon" and "risk tolerance" for purposes of the suitability rule? As a general matter, these terms are to be understood commensurate with their meaning in financial analysis. FINRA, however, offers the following guidelines:. FINRA recognizes that there can be an inverse relationship between an investment time horizon and liquidity needs in that the longer a customer's time horizon, the less the need for liquidity.
However, a customer may have a long time horizon, but also may need or want to invest all or a portion of his or her portfolio in liquid assets to pay for unexpected expenses or take advantage of unforeseen opportunities. Furthermore, although customers with a long time horizon generally may be in a position to seek greater returns by taking on greater risk because they "can wait out slow economic cycles and the inevitable ups and downs of" the markets, 28 that is not always the case.
Some customers with long time horizons may not desire to take on such risk and others, because of considerations outside their time horizons, are unable to do so. Does a firm have to use the exact rule terminology when seeking to obtain customer-specific information? FINRA is aware that some firms currently ask customers for relevant information without using the exact rule terminology or separately designating factors e. Firms may continue to use such approaches.
Firms must attempt to obtain and analyze relevant customer-specific information. Although firms should be capable of explaining how they are doing so and, where appropriate, evidencing that they are doing so, the rule does not dictate use of a specific method or process or of particular terminology. What is a firm's responsibility when customers indicate that they have multiple investment objectives that appear inconsistent?
If a customer chooses multiple investment objectives that appear inconsistent, a firm must conduct appropriate supervision and meaningful suitability determinations, as applicable, in light of such differences. Can a customer with multiple accounts at a single firm have different investment profiles or investment-profile factors e. A customer could proceed in such a manner, but a firm should evidence the customer's intent to use different investment profiles or investment-profile factors for the different accounts.
Nothing in this guidance, however, relieves a firm from having to ensure that the investment profiles or factors accurately reflect the customer's decisions. In addition, where a firm allows a customer to use different investment profiles or factors for different accounts rather than using a single customer profile for all of the customer's accounts, a firm could not borrow profile factors from the different accounts to justify a recommendation that would not be appropriate for the account for which the recommendation was made.
Can a broker make recommendations based on a customer's overall portfolio, including investments held at other financial institutions? For instance, does each individual recommendation have to be consistent with the customer's investment profile or can the suitability of a broker's recommendation be judged in light of its consistency with the customer's overall portfolio? The answer depends on the facts and circumstances of the particular case.
The suitability rule applies on a recommendation-by-recommendation basis. A suitability analysis of a particular recommendation and consideration of a customer's overall investment portfolio, however, are not mutually exclusive concepts. The new suitability rule as with the predecessor rule requires a broker to seek to obtain and analyze a customer's other investments. The rule thus explicitly permits a suitability analysis to be performed within the context of a customer's other investments.
Some customers, moreover, desire portfolios made up of securities with different levels of liquidity, risk and time horizons. When a broker is aware of a customer's overall portfolio including investments held at other financial institutions , the broker is permitted to make recommendations based on the customer's overall portfolio as long as the customer is in agreement with such an approach.
Under these circumstances, the suitability of a broker's recommendation may be analyzed on the basis of whether the customer's overall portfolio, considering any changes to the portfolio that flow from the broker's recommendation, aligns with the customer's investment profile.
As noted above in the answer to [FAQ 3. Accordingly, a broker may not use a portfolio approach to analyzing the suitability of specific recommendations when:. Nothing in this guidance, moreover, relieves a firm from having to ensure that a customer's investment profile or factors within that profile accurately reflect the customer's decisions.
Should the investment experience of a guardian, custodian, trustee or similarly situated third party managing an account be taken into consideration when making account recommendations?
In many circumstances, the answer is yes. In the case of a trust held in a brokerage account, for instance, the firm should consider the trustee's investment experience with, and knowledge of, various investments and investment strategies. The firm, however, also must consider factors such as the trust's investment objectives, time horizon and risk tolerance to complete the suitability analysis.
It also is important to note that, where an institutional customer has delegated decisionmaking authority to an agent, such as an investment adviser or a bank trust department, Rule b makes clear that the factors relevant to determining whether the customer meets the criteria for the institutional-customer exemption will be applied to the agent.
Your market opinion would be neutral to bullish on the underlying asset. On the risk vs. If volatility increases, it has a negative effect, and if it decreases, it has a positive effect.
When the underlying moves against you, the short calls offset some of your loss. Traders often will use this strategy in an attempt to match overall market returns with reduced volatility.
Page 1 of 3. Fishing With Alternative Data. Short-term signals in E-minis, crude and gold. The age old question.
Safe Option Strategies. The primary idea behind options lies in the strategic use of leverage. Investors ought to be systematic in their choice of strategy. The better options strategy to employ should always be determined by the general market opinion and what the investor’s goals are. May 12, · Options are excellent tools for both position trading and risk management, but finding the right strategy is key to using these tools to your advantage. Beginners have several options when choosing a strategy, but first you should understand what options are and how they work. Additionally, if you’d like to know the second best way to use options, and one of the best ways to purchase stocks, see “Put Option Selling.” More On Stock Option Strategies Options strategies are basically bets against the market and time. They seek to use the power of leverage.