Uncovered Call Writing: Highest Risk Category and Suitability
A retail client with a moderate risk tolerance and an annual income of $45,000 applies for Level 4 options approval to write naked (uncovered) call options on volatile biotechnology equities. What is the regulatory and supervisory obligation of the broker-dealer?
Naked call writing exposes investors to UNLIMITED financial loss. Under FINRA Rule 2360 and Reg BI, writing uncovered calls is unsuitable for clients with moderate risk profiles.
Complete Analysis & Legal Rationale
Uncovered call writing is the highest-risk strategy in the options markets because the writer is obligated to sell stock at the strike price with no ownership of the underlying shares, exposing the writer to unlimited losses if the stock surges. Member firms must establish strict specific criteria regarding investment experience, net worth, and risk tolerance before approving customers for uncovered option writing.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Naked call writing exposes investors to UNLIMITED financial loss. Under FINRA Rule 2360 and Reg BI, writing uncovered calls is unsuitable for clients with moderate risk profiles.
Fails to reflect correct options pricing/mechanics for B.
Fails to reflect correct options pricing/mechanics for C.
Fails to reflect correct options pricing/mechanics for D.
Official Standard: Uncovered call writing is the highest-risk strategy in the options markets because the writer is obligated to sell stock at the strike price with no o