FINRA Rule 2360 is the rulebook that governs how FINRA member firms handle options trading with public customers. It controls who can be approved to trade options, what information the firm must collect first, what risk disclosures the customer must receive, how many contracts a trader can hold, and how the firm must supervise the account after it opens. The rule applies whether the customer is a retail investor buying a few calls or an institutional desk running complex strategies, and it reaches every stage of the relationship from onboarding through ongoing review.
Which Options the Rule Covers
Rule 2360 governs transactions in standardized options, conventional options, index options, and FLEX Equity Options. Standardized options are the exchange-listed contracts most retail traders encounter. Conventional options are contracts not issued by The Options Clearing Corporation. A subcategory called OCC Cleared OTC Options sits between the two: they trade over the counter but clear through the OCC.
The categories matter mainly for disclosure. The core sales practice and suitability obligations apply across all of them, but certain required documents (the Options Disclosure Document and the Special Written Statement for uncovered writing) are not required for OCC Cleared OTC Options or for conventional options. If a FINRA member firm touches options with public customers in any capacity, the rule’s approval, supervision, and recordkeeping obligations apply.
Account Approval and the Information Firms Must Collect
No firm can accept an options order from a customer whose account has not been specifically approved for options trading. The approval process is where most enforcement problems arise, and it demands more than FINRA Rule 2090’s general “Know Your Customer” obligation.
Before approval, the firm must collect, at minimum, the individual customer’s:
- Investment objectives, such as capital preservation, income, growth, or speculation
- Employment status, including employer name, self-employment, or retirement
- Estimated annual income from all sources
- Estimated net worth, excluding the family residence
- Estimated liquid net worth in cash, securities, and other liquid assets
- Marital status and number of dependents
- Age
- Investment experience and knowledge, including years of experience, typical transaction size, frequency, and the types of instruments traded
Net worth is figured without the family residence so customers cannot inflate their apparent wealth with home equity they could not readily use to cover options losses. If a customer refuses to provide any of this information, the firm must document the refusal and weigh it in the approval decision.
A Registered Options Principal, or a Limited Principal for General Securities Sales Supervision, must personally review the information and issue written approval or disapproval before any options trade is placed. The account records must specify what transaction types the customer is approved for, such as buying options, covered writing, uncovered writing, or spreads. Within 15 days of approval, the firm must send the customer a copy of the background and financial information it relied on, so the customer can verify or correct it.
Disclosures the Customer Must Receive
At or before account approval, the firm must deliver the Options Disclosure Document, formally titled “Characteristics and Risks of Standardized Options.” The ODD covers how options work, the risks of buying and writing them, transaction costs, margin requirements, and tax consequences. When the ODD is amended, the firm must send the updated version to existing options customers no later than the next trade confirmation in the affected options category. ODD delivery is not required for OCC Cleared OTC Options or for conventional options.
For customers approved to write uncovered short options, the firm must also deliver a Special Written Statement in a format FINRA prescribes. Uncovered writing carries theoretically unlimited loss potential, and this separate disclosure addresses that specific risk. The Special Written Statement is likewise not required for OCC Cleared OTC Options.
Within 15 days of approval, the customer must sign a written agreement acknowledging receipt of the required disclosures, agreeing to follow FINRA’s options rules, and agreeing to be bound by the rules of The Options Clearing Corporation.
Position and Exercise Limits
Rule 2360 caps how many option contracts a trader, or a group of traders acting together, can hold on the same side of the market for a given underlying security. For standardized equity options, the limit is set by the listing exchange. For conventional equity options, the rule establishes its own tiered structure starting at 25,000 contracts and rising through 50,000, 75,000, 200,000, and 250,000 contracts based on the underlying security’s trading volume and float, with certain ETFs approved for 500,000 contracts.
“Same side of the market” combines bullish positions together (long calls plus short puts) and bearish positions together (short calls plus long puts). A trader holding 20,000 long calls and 10,000 short puts on the same underlying has a 30,000-contract position for limit purposes, which would exceed the 25,000-contract default.
To qualify for a tier above 25,000 contracts on a security that does not have standardized options trading, the firm must demonstrate to FINRA’s Market Regulation Department that the underlying meets the relevant volume and float standards. If FINRA staff later determines a different limit should apply, the firm must reduce its position.
Hedge Treatment
For standardized options, qualified hedge strategies (covered positions, conversions, reverse conversions, collars, and reverse collars) are fully exempt from position limits. For conventional options, the same hedge strategies raise the limit to five times the standard figure, so a position otherwise capped at 25,000 contracts could reach 125,000 contracts if properly hedged.
Exercise Limits
Exercise limits mirror position limits. No one can exercise more contracts in a given class than the applicable position limit within any five consecutive business days. This stops a trader from staying under position limits by rapidly exercising and re-establishing positions. FINRA can grant exceptions in writing under the Rule 9600 Series, but only for unusual circumstances with good cause shown.
Large Position Reporting
For over-the-counter options, firms must file a Large Options Positions Report for any account or group of accounts acting together that holds more than 200 contracts on either the bullish or bearish side of the market. When the position drops below 200 contracts, the firm files one final report and can stop reporting until the position crosses the threshold again.
Ongoing Supervision After the Account Opens
Approval is the starting point, not the end. The firm’s principal supervisory office must maintain readily accessible information to review each customer’s options account on a timely basis. That review must evaluate:
- Whether transactions are compatible with the customer’s stated objectives and approved trading levels
- The size and frequency of options transactions
- Commission activity in the account
- Profit or loss patterns
- Undue concentration in any options class
- Compliance with Federal Reserve Regulation T margin requirements
A pattern of heavy losses combined with high commission activity, for example, should prompt a closer look at whether the account is being churned or whether the customer’s approval level still fits their situation.
Firms must send account statements at least monthly to any options customer with activity in the preceding month, and quarterly to customers who have open positions or a money balance but no recent transactions. Statements must show security and money positions, all entries, interest charges, and any special charges.
Every firm must also keep a separate central log exclusively for options-related complaints at its principal place of business or another designated principal office. Each entry records the complainant, the date received, the registered representative on the account, a description of the issue, and the firm’s response. Branch offices that receive options complaints must forward them to the central file within 30 days and keep a copy at the branch. Customer background and financial information for approved accounts, and copies of account statements for at least the most recent six months, must be maintained at both the servicing branch and the principal supervisory office, though the principal office may store them elsewhere if they remain readily accessible.
Who the Registered Options Principal Is
The Registered Options Principal who approves accounts and oversees options trading must pass three FINRA examinations: the Securities Industry Essentials exam, the Series 7 General Securities Representative exam, and the Series 4 Registered Options Principal exam. FINRA Rules 1210 and 1220(a)(8) govern the registration requirements. The ROP serves as the gatekeeper for every options account approval and carries ongoing responsibility for reviewing transactions and keeping the firm’s options activity compliant.
How Rule 2360 Connects to Margin
Rule 2360 works alongside FINRA Rule 4210, which sets margin requirements for options accounts. For uncovered short option positions, Rule 4210 requires minimum account equity, and Rule 2360 requires firms to establish their own minimum net equity thresholds for customers writing uncovered options. FINRA guidance suggests firms set those minimums higher than the Rule 4210 floor given the risk of uncovered positions.
Spread positions receive more favorable treatment. If the short leg of a spread is assigned, the customer can exercise the long leg the same day to close out the resulting position without meeting the initial margin requirement on the security position. Because the headquarters review process explicitly includes Regulation T compliance, margin monitoring sits inside the broader supervision framework rather than off to the side.
What Happens When Firms or Representatives Do Not Comply
FINRA enforces Rule 2360 through its disciplinary process, and the most common violation is the most basic one: accepting options orders before the account has been approved. In one disciplinary case, a registered representative who accepted options orders for a customer whose account had never been approved for options trading received a 20-business-day suspension, a $10,000 fine, and an order to disgorge commissions earned on those trades plus interest. The case also charged a violation of FINRA Rule 2010, the general standards of commercial honor, because failing to follow the options approval process is treated as conduct inconsistent with just and equitable principles of trade.
Firms that lack adequate written supervisory procedures for their options business, fail to maintain the required records, or do not conduct the headquarters-level account reviews face their own enforcement exposure. The rule’s detailed procedural requirements create a paper trail, so examiners can identify deficiencies during routine reviews. For any firm running an options business of real size, the compliance infrastructure Rule 2360 demands is the cost of being in the business.