Options Trading Losses: When Your Broker May Be Responsible
Options can lose money fast, and some investors lose far more than they ever meant to risk. If a broker recommended an options strategy that didn’t fit your goals, traded options in your account without your approval, or put you in positions you didn’t understand, you may be able to recover your losses through FINRA arbitration.
What Are Options?
An option is a contract that gives the buyer the right to buy or sell a stock at a set price, called the strike price, before a set date. A call gives the right to buy. A put gives the right to sell. The seller of the option takes the other side of that bet in exchange for a payment called the premium.
A buyer can lose the entire premium. A seller can lose much more.
Why Options Trading Losses Can Be So Large
- Leverage. A small move in the stock can mean a large percentage gain or loss on the option.
- Time decay. Options lose value as expiration gets closer, and many expire worthless.
- Uncovered positions. Selling a call without owning the stock exposes you to losses with no upper limit. Selling an uncovered put can force you to buy the stock far above its market price.
- Margin calls. Uncovered options are usually traded on margin. A sharp move can trigger a margin call and forced selling at the worst time.
- Complex strategies. Spreads, straddles, and iron condors combine several options at once. The real risk can be hard to see, and getting out can be expensive.
Common Options Strategies Brokers Recommend
| Strategy | How it’s often pitched | The risk |
|---|---|---|
| Covered calls | Extra income on stocks you already own | Caps your gains, and the stock can still fall |
| Selling puts | Get paid to wait for a lower buying price | You may have to buy the stock at the strike price in a falling market |
| Naked calls | Steady premium income | Losses have no upper limit if the stock rises sharply |
| Spreads and iron condors | Defined, limited risk | Losses can still be large compared to the account, and frequent rolling adds commissions |
What Brokerage Firms Must Do Before You Trade Options
Under FINRA Rule 2360, a firm must gather information about your investment objectives, finances, and experience before approving your account for options. A registered options principal must review and approve the account and the level of trading allowed. The firm must also give you the Options Disclosure Document, which explains the risks.
When a broker recommends an options strategy to a retail investor, the recommendation must also meet Regulation Best Interest. That means the broker must have a reasonable basis to believe the strategy is in your best interest, given your profile, the risks, and the costs. The firm must then supervise the trading under FINRA Rule 3110.
FINRA has reviewed how firms open and supervise options accounts. That review led to formal actions against Webull Financial, Fidelity Brokerage Services, Interactive Brokers, and TD Ameritrade.
Warning Signs of Broker Misconduct in Options Trading
- Your new account form shows more experience, income, or net worth than you actually have
- You were approved for a higher options level than you asked for or understood
- Your broker recommended options even though your goals were income, safety, or retirement
- Positions were opened and rolled over again and again, with high commissions
- Options trades appeared that you never approved
- Most of your account was tied to options on a single stock
- Your broker called the strategy “safe” or “guaranteed income”
- You received margin calls you didn’t expect or understand
Can You Recover Options Trading Losses?
A trade that went badly is not a claim on its own. Claims focus on how the broker and the firm handled your account. Common claims include unsuitable recommendations, misrepresentation of risk, unauthorized or excessive trading, and failure to supervise.
Start by gathering your new account form and options agreement, account statements, trade confirmations, and any emails or texts with your broker. Check the options agreement closely. Inflated experience or net worth figures on that form are a frequent sign of a problem.
Speak With an Options Trading Losses Attorney
If you lost money on options trading your broker recommended or controlled, The White Law Group may be able to help. We are national securities fraud attorneys with offices in Chicago and Seattle, and we represent investors in FINRA arbitration claims in all 50 states.
Call us at (888) 637-5510 or contact us online for a free consultation.
Frequently Asked Questions
How do I file a claim to recover options trading losses?
Most investors file a claim through FINRA arbitration. Most brokerage account agreements typically include a pre-dispute arbitration clause, so disputes go to FINRA rather than court, and arbitration can still result in a monetary award. Claims have time limits, so it’s best to act early.
What is unsuitable options trading?
It is an options recommendation that doesn’t fit your goals, finances, experience, or tolerance for risk. A conservative retiree placed in uncovered options on margin is a common example.
Can the brokerage firm be responsible if it approved my account for options?
Yes. Approving the account doesn’t end the firm’s duty to supervise the trading that follows. If the approval was based on information the firm should have questioned, that can itself be a supervision failure.
