Series 9 Chapter 1 and 2 Equity Options

Catastrophic Errors can be adjusted or fixed, it needs to be conveyed to the Exchange prior to 7:30 AM Central Time (8:30 Eastern) on the First trading day following the execution.

Erroneous Transaction Reporting Thresholds: On *Exchange traded securities* 1) Report error within 30 minutes of becoming aware. 2) Appeals CAN be made Erroneous Trades: Reference Price = % Away of Reference Price $0-$25 = 10% $26-$50 = 5% >$50 = 3%

Assignment of Exercise Notice: - OCC to *Member (B/D)* is done on a *Random Basis* and assignment is made *the next business day*, PRIOR to trading. -Member to *Client* can be done on a *Random Basis OR First in First Out (FIFO) OR any other method approved by the exchange*

Exercise Notices are NOT assigned based on the largest short position. *If a member changes its assignment method, it must be reported and approved by FINRA* *Records* of assignments must be kept for *3 years*.

Option Position Limit Rules: These are rules that limit the number of option contracts (or SHARES when looking mini or jumbo options) that an investor can have in their account at one time when the positions are on the *same side of the market*. (bearish or bullish) Same side of the market positions: Bullish: LC, SP or your Long Stock Bearish: SC, LP or your Short Stock

*EXEMPT* from the position limit rules are Equity HEDGE Options: Short Stock and LC or SP (covered/hedge positions) Long Stock and SC or LP (covered/hedge positions) Ex) One of your customers is a portfolio manager. This manager places an order for 20 million shares of XYZ common stock. XYZ has a position limit of 500,000 contracts. This order is a hedge against the manager's writing of 200,000 calls on XYZ. What is the total number of calls eligible to be written by this same manager on the same class of security? 500K because of the hedge position

*all option trades must be executed on the floor of the exchange unless the customer can receive a better price away from the exchange (when the premium is more than $1)

*Spread Priority Rule*: Allows spreads to take priority over individual bid and offer orders *IF it is ALL of the following*- Executed as a *simultaneous B&S* on both sides of the order. Done on a *One for One basis* 1:1 A *liquidating Transaction*

A customer buys 200 shares of XYZ @ 40 and sells 2 ABC May 45 Calls @ 2. At expiration, what is the customer's breakeven point?

-4,000 + 200 = 3800

ASK (offer) Price = price they would PAY to *buy* an option (Higher Price) APB(higher) BID Price = Price they would RECEIVE to *sell* an option (Lower Price) BRS (lower) Ex) Bid of 14, Ask of 15, what's an acceptable quote for a market maker? Market makers can only enter a quote "inside" the current bid and ask price from customers therefore the market maker could bid 14 1/4 - Ask 14 3/4 - because those prices are in between the Bid of 14 - Ask 15.

1 option contract = 100 shares of stock UNLESS there's a: 1) *Stock Dividend* 2) *Stock Split* 3) *Reverse Split* However, *Cost Basis* is NOT affected by these three. Dan purchased 5 ABC July 50 Calls @2. This month ABC announces a 1 for 10 reverse split. Cost Basis remains unchanged at $1000 (5*200) *Listed Options are NOT adjusted for ordinary Cash Dividends* (unless the cash dividend yields at least *$12.50* per option contract)

Joyce is long 20 May 20 Calls @ 3, since she is bullish on ABC. Unexpectedly, ABC announces a 1:10 reverse stock split. How will this split impact the position that Joyce has?

1/10 X 100/1 = 100/10 = 10 shares per contract After the split she will be Long 20 May 20 Calls, each Call representing 10 shares. The # of option contracts remains the same.The # of shares of common stock the option represents is decreased.The strike or exercise price remains the SAME.

The *margin* required for writing UNCOVERED equity options would be the stock price times ___% PLUS the PREMIUM for the option. Margin required on a spread is the Maximum Loss.

20% Ex)Market Value of XYZ= $25 Premium of option is $6 25 X 100 shares (assumed)=2500 2500 X 20% = 500 500 + 600 (assumed) = $ 1,100

A customer buys 1 XYZ October 50 call at 3. He later exercises the option when XYZ is selling at $60 per share. The cost basis of the 100 shares for Federal tax purposes is?

5300

*Exercise Cut-Off Time* is _____eastern time on the THIRD Friday of the EXPIRATION month. *Expiration Time* occurs at _____ eastern time on the THIRD Friday of the EXPIRATION month. *Cease Trading Time* is at ____ eastern time on the THIRD Friday of the EXPIRATION month.

5:30 PM 11:59 PM 4:00 PM

The Short Straddles or Short Combos (strangle) always have UNLIMITED LOSS POTENTIAL Because it is always assumed that the short call is uncovered.

A *Short Straddle or Combination will be profitable if the market value of the stock stays "inside" or in between the breakeven prices.* To determine breakeven we take "both" premiums and add them to the strike price of the Call (up) and subtract them from the strike price of the Put (down). *A Long Straddle would only be profitable if the market price of the stock moves "outside" of the breakeven prices*

The only option position listed that WOULD *interrupt or eliminate the holding period of a stock held for less than 1 year* would be the *purchase of the put* on the same underlying stock.

A client is Long Stock held less than a year. The only option position that would *NOT interrupt its holding period is a LC* because a LC simply Adds to the Long Stock Position.

An investor who wants to protect a profit on a long stock position by spending the least amount of money would most likely Buy Out-of-the-Money Puts. By buying the Puts, the investor has full downside protection but since the Puts are out-of-the-money, the premium expense would be lower than Buying In-the-Money Puts. The investor could sell Calls BUT the protection would be limited to the amount of premium received when selling the Calls.

A put is considered to be "in-the-money" when the market price of the underlying security is LOWER than the exercise price of the put. Therefore, puts are considered to be "out-of-the-money" when the market price of the underlying security is HIGHER than that of the exercise price. One other thing to remember - when reading a question on buying or selling calls and puts that are "in-the-money" or "out-of-the-money," both calls and puts will be either in the money or out of the money regardless of whether they are being bought or sold. Calls are "in-the-money" when the market price of the underlying security is higher than that of the strike price, and Puts will be "in-the-money" when the market price of the underlying security is lower than that of the strike price. deep in the money is substantially in the money

Straddle = Long C&P or Short C&P with the *same stock, same expiration month, same exercise price* Strangle or Combo = a straddle but with *different exercise prices* OR *different expiration months*

A trader who writes a foreign currency option straddle would want the spot price of the currency to stay flat or neutral. This would cause both options to expire unexercised. If the spot price remained within the breakeven prices on the upside and downside (strike plus or minus the sum of the two premiums), the trader would profit. If the spot price remained constant at the exercise price of the contract, an exercise would be unlikely. If the spot price rises above or below the exercise price plus or minus the sum of the two premiums, the trader is likely to experience loss when closing the position or receiving an exercise notice.

Trading Permit Holder grants the right to access the exchange AND even effect transactions in securities traded on the exchange, but does NOT give you ownership interest in the exchange.

According to the CBOE, Option Transactions must be reported by the *Buyer AND the Seller* within *90 seconds* *All options trades must be executed on the floor of the exchange UNLESS the customer can receive a better price away from the exchange floor* (premium must be >$1.00)

Floor brokers are agents for their public investors. This leaves them with a fiduciary duty to try and achieve the best possible pricing for their clients, putting their clients' needs ahead of other needs. Floor brokers are not permitted to trade for themselves ever because of the potential for conflicts of interest when dealing with their own accounts versus public clients' accounts. Floor brokers trade for all public customers NOT just proprietary accounts.

An investor expects that the Canadian Dollar will appreciate in relation to the US Dollar. Using options on currencies, how can this investor take advantage of the anticipated move? this investor would be on the bullish side of the market in relation to the Canadian Dollar. This would mean that the investor could buy calls or sell puts, both bullish positions, in order to profit from the anticipated currency movement. (same as us dollar)

OPTION POSITIONS: Holder/Buyer/Long = The Driver/ The right to do something Seller/Writer/Short = The Passenger/ Obligated to do something

An investor seeking INCOME or an INCREASED RATE OF RETURN is the SELLER or Writer of Option Contracts. They want that premium. An investor seeking MAXIMUM profit potential or Maximum protection, you are the BUYER.

The CBOE Volatility *VIX* Index is a measure of market expectations of near term (30 days) volatility of options on the *S&P 500 Index* It is popularly known as the "fear gauge". The higher the investor fear, the higher the VIX Index. VIX moves in the opposite direction of teh S&P 500 so hedging is Opposite of the standard T chart. The *expiration* date is always on a *Wednesday* which is also the last day to exercise the option. Trading closes at 4:15 pm Eastern Time. Expirations are based on a February Cycle. Trading hours are 9:30-4:15. European Style

Broad Based index options at Year End are marked to market and treated as a sale affecting investors Tax Basis. Broad-based index options and ETF options trade 9:30am-4:15pm EST. Equity options (NYSE and NASDAQ) as well as narrow-based index options trade 9:30am to 4pm EST.

CBOE Electronic Book: Customer orders that are sent to the E-book system, if executed, will *take priority* over orders at that price placed by other investors such as institutional investors. Two Automated Trading Systems = ROS & HOSS

CBOE Trading Rotations: Stock Opens, Option Opens *Opening Rotation* is ONLY *Public* and *Limit* orders The *Opening Rotation* can ONLY be conducted by: 1)Order Book Official - keep book of 'limit' orders 2)Market Maker - trade for their own accts, their main purpose is to provide *liquidity* to the options market.

Winged Positions: Butterfly, Short Iron Butterfly, Short Condor = Neutral Strategy Long Butterfly, Long Condor = Expect big move up or down

Call Up In the Money = Mkt Price > Exercise Price (Intrinsic Value) Put Down = Mkt Price < Exercise Price Premium - Intrinsic Value = TIME Trading @ a Discount = Intrinsic Value > Premium

If your option is 'in the money' by $0.01 or more, the OCC automatically exercises it. If the customer does not want it exercised, they fill out a *Contrary Exercise Advise* form and submit it by 7:30 PM Eastern Time. (contrary exercise advice would be exercise at 7:30)

Companies are not allowed to Sell Calls against it's own stock because that would be insider information.

Debit Spread (D W C) 1) Maximum Loss Potential = Net Debit in Premiums IF the options expire. *also margin requirement 2) Max Profit Potential = Difference between strike prices *less* the net debit. 3) Debit Spreads must WIDEN by more than the Net Debit to be profitable. BreakEven: Debit (-) determined by the the Long (-) position. Call UP= Long Exercise Price + Net Debit of Premiums Put DOWN= Long Exercise Price - Net Debit of Premiums *Margin* on spreads = the maximum loss

Credit Spread (C N E) 1) Max Profit Potential = Net Credit in Premiums IF the options expire. 2)Max Loss Potential = difference btwn strike prices *less* the net credit in the premiums. *also margin requirement 3)Credit Spreads must Narrow and/or Expire to be profitable. BreakEven: Credit(+) determined by Short (+) position. Call UP= SHORT Exercise Price + Net Credit of Premiums Put DOWN= SHORT Exercise Price - Net Credit of Premiums *Margin* on spreads = the maximum loss

Remember that a short put position is on the upside of the market and if exercised would result in the seller being obligated to buy the underlying shares. The puts would be considered to be "uncovered" because stock does not cover "puts" and we assume that there is not sufficient cash in the account to cover the Put after the purchase of the stock, therefore this would be a Naked Put Sale. (Short Calls are covered with stock.)

Discretionary options require heightened review. However, regulators allow a member firm flexibility in how to surveil discretionary orders if the member uses a computerized system to do the surveillance. The firm can elect to continue to have all discretionary options orders reviewed and initialed by a ROP at the end of the day even if it uses a computerized surveillance system. If, however, the firm does not utilize such a system, the firm MUST have all discretionary options orders reviewed and initialed by a ROP (other than the ROP who placed the order) by the end of the day.

Option Settlements: *Clearing Member Paying OCC* is the next business day after trade date. no exceptions. *Customers* - settlement is next business day after trade date BUT they are entitled (under Reg T) to a 4 day grace period. If the option is *Exercised* it settles 2 business days from the time *the OCC receives the EXERCISE notice* (2 business days to pay for the purchase in a cash account or deposit Reg T 50% in a margin acct)

If an investor exercises a long call (buys the stock), the investor could immediately sell the stock once the exercise instructions have been given to the firm.

When a corporation has agreed to be paid in Euro currency, they would be concerned about the value of the Euro going down. To protect themselves from a decline in the value of the Euro, they would buy puts on the Euro Currency.

If concerned that the Swiss Franc will increase in value relative to the US Dollar and your looking to hedge... You should buy calls and/or sell puts on the Swiss Franc

Yield-Based or Interest Rate Options are *settled (delivered)* in *cash*, not securities with corresponding rates.

In August she decides to buy 1 Feb *Broad-based index Call* @3. At year end Courtney's call option had a market value of 6. At the end of January of the next year Courtney sells her Call @ 7. What, if any, would have been Courtney's tax situation at the end of the year that she bought the Call? IRS Regulations require *broad-based index options* be *marked to market at year-end* and *treated as a sale at the fair market value* as well as affecting the investors tax basis. Because of this, Courtney would have to report a capital gain of $300 ($600 year-end value less $300 cost basis = $300 gain).

*Direct Market Access* allows the customer to BYPASS the Broker-Dealer and enter orders directly into trading systems.

Market Not Held Order - gives the floor broker *discretion on Time and Price*, generally used for large orders. Stop Order - an order that becomes a market order when the trade takes place at or through the stop order price. Used to protect long and short positions. Fill or Kill - at once, in its entirety, or its canceled. Immediate or Cancel - A market or limit order which is to be *executed in whole or in part* as soon as such order is represented in the trading crowd. all or none - entirety but not immediately

The *OCC* is the: (GIC) Guarantor Issuer Clearing Agency (counter party & clears & assigns) of all listed options in the US. The OCC is the *counterparty* to all options traded on all US exchanges. Although *trades are executed on the floor* of the exchange, the OCC guarantees viability of option contracts and *clears and assigns* all option contracts. *Trades are NOT reported on the consolidated tape*

OCC will accept the following securities as collateral for margin: 1) *Common Stock valued at $3 per share or Greater* 2) *Letter of Credit* denominated in US Dollars

> 390 orders per day on average during any month in a given quarter = orders marked *professional* for the entire NEXT quarter. (professional is longer word so >390) < 390 = orders marked *priority*

Order Counting Purposes: Single Order= Complex, Parent, Existing that is Refreshed Second Order = Cancel/Replace Not Counted = Flex Option Orders (allow you to customize exercise price, style and expiration date)

It's beneficial to keep your Calls Short when your talking to Peggy.

Pegging- taking any action to *fix or peg the price* of the underlying security at a particular value (capping is a form of Pegging). Short Calls benefit the most from Pegging. Capping - *selling short to keep the stock price down* so that calls expire worthless and the writer keeps the premium. Front Running - undertaking option transactions to *take advantage of the appearance of a large block of the security*, when the individual has prior knowledge that the block is forthcoming.

Cabinet (affecting *Closing* transactions) Trading can *NOT take place off the exchange* in relation to the OTC market. A member may NOT make an off-the-floor trade...unless: it's an Opening (Off the floor) transaction OR It's a closing transaction for a premium of $1 or less per contract. Records of off-the-floor must be kept for 1 year. Cabinet Trading limit orders are at a price of *$1.00* per option. *All trades must be reported following the close of each business day* Bids and offers must be submitted in WRITING

Remember: Cabinet / Closing, Opening/off the floor, 1, 1, 1. Cabinet Trading = Closing Transactions not allowed Off The Exchange Floor UNLESS Opening Transaction = Off the Floor or Closing Transaction for Premium of *$1* or Less Those Records are kept for *1* year Cabinet Trading Limit orders are *$1* per option

Extended hours trading time is between 4:00-6:30 PM Eastern for NASDAQ for Market Makers when they notify FINRA. The Risk of Extended Hours Trading is *unlinked markets*

Reports provided *daily* by the OCC include: Position Report Margin Report Depository Report

Sally Buys 2 ABC May 60 Call options for $10. What is the most she can lose on the position?

Sally is buying call options. She is the driver of the position. She has the ability to exercise if the market price of the stock goes up. If the market price of the stock goes down, she will not exercise her options and the most that she can lose is limited to the premium she paid for the contracts

Seller of a PUT is 'Covered' : 1) *Funds on deposit* equal to the aggregate price exercise price. 2) obtaining a *bank guarantee letter* 3) Long a PUT equal or GREATER exercise price

Seller of a CALL is 'Covered': 1) *Own the underlying stock* 2) obtain *escrow or depository receipt* 3) Long a CALL with equal or LOWER exercise price 4) convertible bonds or warrants (provided they are immediately convertible or exchangeable for common stock and do not expire before the short calls.

Ian is an avid options trader and takes on large positions. He is long 150,000 ABC calls and is short 100,000 ABC mini puts. ABC has a position limit of 250,000 contracts. How many additional positions could Ian establish before he reaches the position limit for ABC?

Since long calls and short puts are on the same side of the market, those positions would be combined for purposes of the position limits. When determining how many additional contracts he could establish you would first count the Long 150,000 ABC calls and then you would take the Short 100,000 ABC Mini Puts and divide that by 10 since it takes 10 minis to equal 1 standard contract 100,000 divided by 10 = 10,000 contracts Therefore, he currently has 160,000 contracts accumulated towards the position limits. 250,000 Total position limit less 160,000 contracts accumlated = 90,000 remaining standard contracts on the same side of the market which could be established by the investor before he reaches the position limit.

*BULL Spread* is when you *Buy* the *Lower* Strike Price. Bull Spread *PROFITS* from a *RISE in the MARKET Price*.

Spreads: used to *limit risk* Investor feels *sure about the direction* of the market Putting spreads on simultaneously puts you on both sides of the market and therefore *limits risk* and *limits profit potential*. Expects positions to Expire or Close, they intend to make or lose their money in the premiums. Types: Calendar/Horizontal/Time = Diff Expiration Months Vertical = Diff Strike Price (Bull or Bear) Diagonal = Diff exercise price AND expiration months

SEC Rule 144 - holder of UNregistered securities may make a public sale without filing a registration statement with the SEC. It covers the resale of restricted and control stock.

Stock Price remains UNCHANGED, Option Premiums go down.

Limit up limit down mechanism - prevents trades occurring outside of a specified price with three bands (5%, 10% & 20%). If the stocks price does not naturally move back within the price bands within 15 Seconds there will be a 5 minute pause. These bands will double during the opening and closing of the trading day.

Taxation: Constructive Sales = Hedging position of long stock that has appreciated in value. (Long Stock and LP or Short Same Stock) is treated as if they 'sold' the stock and the investor would have to: 1) recognize the capital gain 2) begin a new holding period on the Long Stock on the date of the 'constructive sale'

Taxation: If an investor is Long Stock and writes a Covered Call against the stock, the covered calls expire...the investor must: 1) treat the *Premium income as a Short Term Capital Gain* in the year the option expired. 2) maintain the *original cost basis* of the long stock position. (whatever is better for the government)

The *holding period* for tax purposes on *stock that is purchased* when an option is EXERCISED (LC or SP) begins on the *day after the option was exercised*.

A Call writer's chance of being assigned an exercise notice is increased when the Call is In the Money and it is just PRIOR to the ex-dividend date. Remember that whoever ends up owning the stock the day BEFORE the ex-dividend date will be the person entitled to the dividend on the stock, which would prompt the buyer of the Call to exercise. Also, if the Call is In the Money, it increases the chance that the buyer of the Call would be profitable on the exercise as well as receive the dividend

The RR wants to recommend that the client: Buy 25 ABC September 40 Calls @ 4 and simultaneously Sell 25 ABC October 40 Calls @6, for a net credit. As the branch manager the advice you should give the RR is... Since the position would cause the client to be an uncovered call writer for one month (September expiration VS October expiration) the branch manager would have to advice the RR to make sure that this is a suitable recommendation for the client and determine if the client has the financial ability to sustain the uncovered position. It would also be required that the account was approved for uncovered option writing. If the client is new to options, a calendar spread that leaves the client uncovered may not be suitable.

The following option positions are all part of the same? 2 XYZ Jan 60 Put @ 42 XYZ Jan 60 Put @ 22 XYZ Jan 60 Put @ 6

They are all options of the same class (same type of option- Put, same underlying stock XYZ), but more specifically they are of the same *series* of options because they have the *same expiration month (January) and same exercise price (60)*.

Traditional Options Expire in *9 Months*, unless it's a LEAP. LEAP options are Long Term options and expire in *39 Months* (if you expect the market to go up over several years you would buy LEAP Calls versus just regular LC because of the long term) Leaps can be purchased on margin (requirement is 75% of premium value)Because LEAPS generally have more time value than Standard/Traditional Options, the premiums are generally more expensive.

Transactions in options are ALWAYS considered to be *capital gains* and *capital losses*. Since the maximum life is 9 months, the capital gain or loss is generally *short term*

Qualified Covered Calls are Long Stock & SC that are: 1) a stock traded on the exchange 2) have *more than 30 days to expiration* 3) strike price that is *NOT deep in the money*(not >$10 in the money) The *Holding Period on the investors long stock position will be interrupted but not lost while the SC is outstanding* *Qualified covered calls are an exception to the tax straddle loss deduction deferral rules* This means that the entire premium that was paid for an expired option is deductible in the current year.

Un-qualified Covered Call is when the calls are *deep in the money* (>$10), it WILL impact the holding period on the long stock: remember Call Up, if the market price of the stock is above the Strike Price, it is In-the-Money. 1) if the investors holding period on the long stock was *short-term* at the time the call was written (< 1 year), *the holding period is Terminated and Reset to Zero when the call is either closed or expires* 2) If the investors holding period on the long stock was *Long Term* (>1yr), it is *Suspended* while the call is outstanding *but is not lost or reset to zero*. (once your Long Term your good) If the option is *at the money* or *out of the money* = the holding period on the Long Stock keeps accumulating. Meaning *writing at-the-money calls provides BETTER tax advantages*

Delta is how much the premium value of the option will change when the underlying stock moves higher or lower by $1.

Under SRO rules, a member may execute an options trade *off of the floor* of an exchange if the member has determined that the customer can receive a better price.

If an option is "at the money" or "out of the money", the holding period on the underlying stock continues to accumulate. For this reason, writing "at the money" or "out of the money" calls provides better tax advantages than writing "in the money" options.

Under the FINRA Code of Arbitration, customers in arbitration have the option in all cases with three arbitrators to choose a majority public panel or an all public panel.

Large Options Reporting System (LOPR) is a system that tracks large option orders, *200 contracts or more*, on the *Same Side of the Market*

Unmatched option trades must be compared and reconciled by 9:00AM Chicago time the next business day.

Strike Prices on Foreign Currency: Japanese Yen = move decimal 4 digits to the right (PRK) Mexican Peso, South African Rand, Swedish Krona = move decimal 3 to the right all other move 2 to the right

When hedging with interest rate options, it is the same as stock options. You would want to buy puts if you think interest rates are going to go down. This investor would *buy a put* rather than sell a call because they are looking for *maximum profit potential*.

When an investor is *short against the box* (L&S the same stock which basically nets you zero) and they *write a call* on the same stock, the call is considered Naked or *uncovered* because the long stock is already covering the short stock. so you would have unlimited loss

While a trading halt is in effect you may still: accept limit orders exercise options

American Style Options = can be exercised *Anytime* after purchase, *after a report of the execution is received by the customer or the customer's broker-dealer firm*. European= can only be *exercised at expiration at the settlement value*. Exercise settlement value is the value of the index on the day before the expiration date (usually Friday). European (IF DVS) Interest Rate Options (Yield Based) Foreign Options (World Currency) DJX VIX SPX LEAPS

World Currency Options: -settle in US Dollars -settlement is the business day following expiration -Customers must receive the Foreign Currency Option (Risk) Disclosure Document *at or prior to the time that the account is approved* for such trading by the firm. The customer must also receive any supplements to the ODD. -moves in the opposite direction of the US $, so hedging is opposite of traditional options! - Expiration Cycle is the last month of each quarter -Must be approved by FCOP - LOC satisfies margin requirement

CBOE rules permit the suspension or delay in trading or a *Fast Market if 2 floor officials approve* Auto Quote System takes in only 3 parameters when pricing: Volatility Interest Dividends NOT inflation

on the CBOE Floor, Market Makers must provide a *two sided market* (bid and ask) with a *minimum of 1 contract* (1-up) for Broker Dealer Orders. *the highest bid shall have priority* *Customer order takes priority by time received sequence - so some customers have priority over others which can cause delay in trade execution.* -Where two or more bids for the same option contract represent the highest price and one such bid is *displayed in the Order Book*, such a bid shall have priority over any other bid received. (priority sequence takes effect: 1) order book official The priority sequence for individuals on the floor bidding the same series is: 1) Board Broker (Order Book Official) - keeps book of limit orders 2) Floor Broker 3) Market Maker - last because trade their own accounts.

*Short Calls* 1) A short, covered call, is the most conservative option position possible. If you OWN the stock you are obligated to sell, you are a covered call writer. 2) A short, uncovered or naked call, is the most speculative option position possible - the loss potential is UNLIMITED. If you do NOT own the stock that you are obligated to sell, you are an uncovered or naked call writer.

you only have to worry about being covered or uncovered as the seller/writer