Printer friendly version

As required by NASD Rule 2860(16)(E)

SPECIAL DISCLOSURE STATEMENT

FOR UNCOVERED OPTION WRITERS

It is important that you understand that there are special risks associated with uncovered option writing that may expose you to potentially significant losses.  This type of strategy, therefore, may not be appropriate for all clients approved with this broker/dealer for option transactions.

It is important that you be aware of the following.

The potential loss of uncovered call writing is unlimited.  The writer of an uncovered call is in an extremely risk position and may incur large losses if the value of the underlying instrument increases above the exercise price.

As with writing uncovered calls, the risk of writing uncovered put options is substantial.  The writer of an uncovered put option bears a risk of loss if the value of the underlying instrument declines below the exercise price.  Such loss could be substantial if there is a significant decline in the value of the underlying instrument.

Uncovered option writing is therefore suitable ONLY for the knowledgeable investor who understands the risks, has the financial capacity and willingness to incur potentially substantial losses and has sufficient liquid assets to meet applicable margin requirements.

In regard to margin requirements, if the value of the underlying instrument moves against an uncovered writer’s options position, significant additional margin payments may be requested.  If you do not make such margin payments, the stock of options positions in your account may be liquidated with little or no prior notice, in accordance with your margin agreement.

For combination writing, where you write both a put and a call o the same underlying instrument, the potential risk is unlimited.  If a secondary market in options were to become unavailable, you could not engage in losing transactions and would remain obligated until expiration or assignment.

The writer of an American-style option is subject to being assigned an exercise at any time after s/he has written the option until the option expires.  By contrast, the writer of a European-style option is subject to exercise assignment only during the exercise period.

It is important that you know that this statement is not intended to enumerate all of the risks entailed in writing uncovered options.  We suggest that you also reach the booklet entitled “Characteristics and Risks of Standardized Options” given to you upon the opening of your options account with this firm.  We specifically direct your attention to the chapter that discusses risks associated with uncovered options.