Series 4 Cheatsheet — Options Principal Supervision, Margin, Trading Controls & Communications

Series 4 tests “principal reflexes.” The best answer is usually the one that applies the correct approval level, applies the correct margin/risk control, preserves an audit trail, and escalates exceptions under WSPs.

This cheat sheet is a study aid (not legal advice). Always follow your firm’s written supervisory procedures (WSPs) and current FINRA/SEC/SRO requirements.

Exam map (where points come from)

Series 4 at a glance (FINRA)

• Items: 125 scored + 10 unscored (135 total)
• Time: 3 hours 15 minutes (195 minutes)
• Passing score: 72
• Corequisites to hold OP registration: SIE + Series 7 (high level; confirm prerequisites with FINRA/your firm)

How Series 4 questions are written (exam mindset)

• Most items are “what must the principal do?” or “what is the best supervisory action?”
• “Best answer” usually combines: right approval level + right disclosure + right control + documentation.
• If the stem mentions an exception (uncovered writer, repeated margin calls, pattern complaints, unusual trading), assume the answer includes heightened supervision and escalation.

Series 4 “best answer” checklist

• Correct approval level: the customer can only do what the account is approved to do.
• Correct disclosure: ODD, program disclosures, margin/day-trading/portfolio margin disclosures when applicable.
• Correct control: segregation, limits, exception reviews, documented approvals.
• Correct escalation: complaints, margin exceptions, suspicious patterns, and rule/limit breaches go up the chain.

Fast eliminations:

• approving accounts or strategies without the required documents/disclosures
• letting an uncovered strategy into a low-approval account
• ignoring margin calls/exceptions or delaying required actions
• distributing options communications without the required principal review

Rule and control map (high level)

You don’t need legal text; you need “what this label is about.”

F1 — Opening options accounts (high yield)

Account opening documentation

• classify customer type (retail vs institutional) and apply the right onboarding controls (high level)
• confirm account type documentation (IRA, trust, fiduciary/entity) and authorization to transact
• apply AML + CIP + KYC expectations; don’t approve incomplete files
• record approvals and retain the audit trail

Typical options “approval ladder” (varies by firm)

Firms use different level names, but many follow a progression like:

• Lower risk: covered writing and/or long options →
• Moderate: spreads and defined-risk combinations →
• Higher risk: uncovered writing and complex strategies

Series 4 questions usually test whether the principal:

• approved the right strategy set for the customer profile, and
• documented why the approval is appropriate, and
• restricted activity when the profile doesn’t support the risk (high level).

ODD and related disclosures

• deliver the Options Disclosure Document (ODD) on time and document delivery (high level)
• recognize ODD supplements and special statements for uncovered writers/programs (high level)
• ensure margin/credit disclosures are delivered when margin is used (high level)
• for portfolio margin, ensure required disclosure/acknowledgement concepts are satisfied (high level)

Common disclosure traps:

• treating delivery as “optional” because the customer is experienced
• using the wrong document version or failing to document delivery/acknowledgement
• approving an uncovered writer without the required special statement/program disclosure concepts (high level)

Approval levels and uncovered accounts

• match strategies to the customer’s objectives, experience, risk tolerance, and approval level
• apply minimum net equity concepts for uncovered options accounts (high level)
• set/confirm the appropriate approval level based on requested strategies (high level)

Uncovered writer “principal reflex” (high level):

• confirm customer experience and risk tolerance support the strategy
• confirm margin capability and documented disclosures are complete
• confirm minimum equity concepts and house requirements are met
• apply heightened supervision for concentrated or repeat-loss profiles

Discretionary handling

• discretionary options trading requires explicit authorization and principal approval (high level)
• ensure periodic review/oversight for discretionary accounts

Discretionary account trap: “customer told rep to trade whenever.” That is not a substitute for documented discretion authority and required approvals (high level).

F2 — Supervising strategies, suitability/best interest, and margin (high yield)

Supervision mindset

• review recommendations and sales activity; don’t assume “customer asked for it” is enough
• confirm the use of options is consistent with the customer profile and account approval level
• monitor position/exercise limits that can constrain customer activity

Recommendation review checklist (Reg BI / suitability mindset, high level)

• Objective fit: does the strategy match income/hedge/speculation intent?
• Risk fit: worst-case loss and drawdown fit the customer’s tolerance?
• Complexity fit: customer understands assignment, early exercise, and margin (high level)?
• Concentration: positions are not disproportionately concentrated in one name/expiration (high level).
• Time horizon: short-dated strategies vs long-term objective mismatch (high level).

Margin essentials (exam level)

• know that strategy choice changes margin requirements (spreads vs naked, etc., high level)
• initial vs maintenance margin concepts; mark-to-market concepts
• margin calls: timing, documentation, and required follow-up when not met (high level)
• portfolio margin: risk-based approach; requires specific disclosures and controls (high level)

Margin call workflow (principal view, high level):

• verify call calculation and issue call promptly
• document contact/notice and deadlines
• enforce restrictions or liquidation steps when not met per WSPs
• escalate repeat calls or unusual patterns for heightened supervision

Strategy payoff quick sheet (exam level)

Use these when the question asks profit/loss/breakeven (per share/contract concept; ignore commissions):

Exam trap: mixing up which strike goes into the breakeven (call uses +, put uses −).

Risk exposure checks (exam level)

• interpret profit/loss/breakeven logic for common strategies (covered call, protective put, spreads, straddle/strangle)
• recognize corporate action adjustments (splits/mergers/dividends) and how they flow through contracts (high level)
• recognize tender offer effects on positions and needed escalation (high level)

Corporate actions “principal reflex” (high level):

• use approved adjustment sources/processes (OCC/clearing) rather than ad hoc calculations
• ensure customer communications are accurate and not misleading
• verify that margin/position limits and risk systems reflect the adjusted deliverables

Complaints handling

• identify a complaint, document it, investigate it, and respond within required timeframes (high level)
• retain complaint records and handle regulatory reporting under firm procedures (high level)

Complaint trap: treating complaints as “service issues.” If it’s a complaint, it must be captured, retained, investigated, and escalated appropriately (high level).

F3 — Trading operations, exceptions, and market access (high yield)

The options trade lifecycle (what principals supervise)

• order entry → routing/execution → clearing → settlement → confirmation/statement
• exercise/assignment processing (including early exercise risk)
• exception reviews (position limits, margin breaches, unusual patterns)

Exercise/assignment workflow

• supervise exercise notices (including contrary exercise advice) and the effect of assignment
• know OCC assignment is random at the clearing level, then allocated within the firm by a documented method (FIFO/random, etc., high level)
• ensure customers are notified of the firm’s allocation method

Exam trap: confusing exercise (holder action) with assignment (writer obligation).

Exceptions and prohibited activity detection

• use exception reports to spot position limit issues, exercise limit issues, and large position reporting triggers (high level)
• ensure order marking/origin/capacity are correct and records are complete
• best execution mindset still applies to options (high level)
• identify red flags for prohibited activity and insider trading/MNPI misuse; escalate (high level)

High-yield exception cues:

• repeated short-dated uncovered writing in unsuitable accounts (risk + supervision)
• unusually large positions across related accounts (aggregation + reporting)
• “as-of” corrections or frequent cancels/rebills (control weakness)
• trading around tender offers or corporate actions with unusual timing (escalate, high level)

Trade errors

• use cancel/rebill workflows and error accounts under strict controls
• document root cause and remediation; escalate significant errors (high level)

Market access controls

• set and monitor customer market access permissions (high level)
• enforce credit and capital limits; stop access on breaches
• ensure pre-trade risk controls exist (high level)

Market access trap: allowing customers or reps to bypass firm controls “because it’s urgent.” The safest answer is always use approved controls and stop access on breaches (high level).

F4 — Options communications (high yield)

Telemarketing

• maintain do-not-call compliance and calling window controls (high level)
• require approved scripts/disclosures when applicable (high level)

Communications categories (Rule 2210 mindset, high level)

• Retail communication: broadly distributed; typically needs principal pre-use approval (high level).
• Correspondence: narrower, retail-directed; still supervised and retained (high level).
• Institutional communication: institutional-only; still supervised and must be fair and not misleading (high level).

Retail communications, correspondence, institutional communications

• retail communications typically require principal pre-approval; maintain archives
• correspondence must be supervised and retained; apply principal review where required
• institutional communications still must be fair and not misleading; follow firm approval/retention rules (high level)
• options worksheets/program materials must include assumptions and risks; avoid “promissory” framing (high level)

Options communications “principal reflex” (high level):

• include balanced risks (assignment, early exercise, unlimited loss for uncovered)
• avoid promissory language (“guaranteed income”, “no risk”)
• ensure any strategy examples include assumptions and limitations
• retain approvals and final versions (audit trail)

F5 — Supervision system and records (high yield)

• written supervisory procedures must cover options business, discretionary controls, and escalation paths (high level)
• maintain options-related books and records (orders, trades, exercise/assignment, approvals, communications)
• retain communications in compliant storage and ensure retrieval/audit capability (high level)

High-yield recordkeeping set (exam mindset):

• account docs + options agreements + approval level evidence
• ODD delivery evidence and special statements for uncovered/programs (high level)
• margin agreements/disclosures and margin call records
• exception reports and documented follow-up actions
• communications (ads, email/IM, social) + approvals + archives
• complaint intake, investigation notes, responses, and reportable event handling (high level)

F6 — Associated persons and personnel management (high yield)

• perform pre-hire checks; identify statutory disqualification concerns (high level)
• manage registrations, CE, and Form U4/U5 updates
• supervise outside business activities and private securities transactions (high level)
• enforce rules on sharing in accounts, guarantees, lending/borrowing, and noncash compensation (high level)
• implement heightened supervision when disciplinary history or risks require it (high level)

Common traps (fast review)

• approving uncovered options for customers without documented capacity/experience/disclosures
• missing the required principal review path for retail communications
• mishandling margin calls or letting accounts “ride” outside WSP-driven escalation
• confusing exercise vs assignment and giving customers wrong expectations
• failing to aggregate related accounts for limits/reporting purposes
• allowing “off channel” communications that can’t be retained/archived

Glossary (expanded, Series 4 scope)

Options basics

• Call / put: call gives right to buy; put gives right to sell (high level).
• Holder / writer: holder owns the option; writer has the obligation if assigned (high level).
• Premium: option price; buyer pays, writer receives.
• Strike price: exercise price stated in the contract.
• Expiration: last date option can be exercised (high level).
• Contract / multiplier: standardized contract size (e.g., typically 100 shares for equity options); multiplier drives P/L scaling (high level).
• Open interest: number of open contracts; used as a market activity indicator (high level).
• Settlement: physical delivery vs cash settlement depends on contract type (high level).
• Moneyness: ITM/ATM/OTM relationship between underlying and strike (high level).
• Intrinsic value / time value: intrinsic is immediate exercise value; time value is the remainder (high level).
• American-style vs European-style: American can be exercised any time; European only at expiration (high level).
• Exercise / assignment: exercise is holder action; assignment is writer obligation (high level).
• Deliverable: what is delivered on exercise (shares/cash/index settlement), adjusted for corporate actions (high level).

Trading lifecycle (high level)

• Opening vs closing transaction: opening creates a new position; closing reduces or eliminates an existing position (high level).
• Buy to open / sell to open: opening a long vs short option position (high level).
• Buy to close / sell to close: closing a short vs long option position (high level).
• Roll: closing one option and opening another (new strike/expiration) as a position management action (high level).
• Early exercise risk: American-style options can be exercised before expiration; principal supervision focuses on assignment risk and customer understanding (high level).
• Contrary exercise advice: instruction that differs from default exercise treatment; must follow firm controls and deadlines (high level).
• OCC: Options Clearing Corporation; clears listed options and assigns exercises to clearing members (high level).

Strategy and risk terms

• Covered call: long underlying + short call; capped upside, downside remains (high level).
• Protective put: long underlying + long put; downside floor at cost of premium + strike relationship (high level).
• Uncovered (naked) option: short option without offsetting position; can have large/unlimited risk (high level).
• Spread: combination of long/short options; can be debit or credit; often defined risk (high level).
• Credit spread: defined-risk spread where premium is received up front; max loss is typically spread width minus credit (high level).
• Iron condor: combination of two spreads designed to benefit from range-bound outcomes; defined risk (high level).
• Butterfly: defined-risk structure with limited profit zone; sensitive to pin risk near expiration (high level).
• Collar: protective put funded by selling a call; caps upside and floors downside (high level).
• Straddle / strangle: volatility strategies combining call+put; breakevens depend on total premium (high level).
• Breakeven: underlying price where P/L is zero at expiration (concept).

Risk and pricing concepts (high level)

• Implied volatility (IV): market-implied expectation of future volatility; affects option premium (high level).
• Time decay (theta): option value erosion as time passes (high level).
• Delta: sensitivity of option value to underlying price moves; directional exposure indicator (high level).
• Gamma: how delta changes as the underlying moves; higher near-the-money as expiration approaches (high level).
• Vega: sensitivity of option value to changes in implied volatility (high level).

Account approval and supervision

• Approval level: firm-defined permission set for which strategies an account may trade (high level).
• Discretionary account: account where rep has authority to trade without customer pre-approval; requires strict authorization/oversight (high level).
• ODD: Options Disclosure Document.
• Options agreement: customer agreement that authorizes options trading and sets baseline disclosures/acknowledgements (high level).
• Options program: structured strategy/program marketed to clients; often requires specific disclosures and approvals (high level).
• WSPs: written supervisory procedures; the firm’s supervision and compliance playbook.

Margin and financial controls

• Regulation T (Reg T): Federal Reserve margin framework (high level).
• Initial vs maintenance margin: required equity at entry vs ongoing minimums (high level).
• Mark-to-market: revaluing positions to current market value; drives margin requirements (high level).
• Margin call: demand for additional equity when requirements aren’t met (high level).
• House requirement: firm-set margin requirement that can be stricter than minimum regulatory rules (high level).
• Liquidation / restriction: actions taken when a margin call is not met; must follow WSPs (high level).
• Portfolio margin: risk-based margin methodology with specific disclosure/control requirements (high level).
• Credit terms disclosure: margin lending disclosures (concept; high level).

Trading controls and reporting (high level)

• Position limit / exercise limit: caps designed to reduce concentration/manipulation risk; monitored across related accounts (high level).
• Large position reporting: reporting requirements triggered by large option positions; requires aggregation controls (high level).
• Order marking / capacity: how an order is labeled (customer/proprietary/market maker, etc.); supports supervision and audit trail (high level).
• Best execution: obligation to seek favorable execution; still applies in options contexts (high level).
• Market access controls (Rule 15c3-5 concept): pre-trade risk controls, credit/capital limits, and supervision for DMA/sponsored access (high level).
• Error account / cancel and rebill: controlled error correction mechanisms with documentation and escalation (high level).

Communications and sales practice

• Retail communication / correspondence / institutional communication: categories under FINRA communications rules (high level).
• Principal approval: required pre-use approval for certain communications; must be documented (high level).
• Do-not-call list: telemarketing compliance control; must be maintained and enforced (high level).
• Options worksheet: written example of strategy payoffs; must be fair, include risks/assumptions, and avoid misleading certainty (high level).
• Promissory language: statements implying certainty/guarantees; generally prohibited in regulated communications (high level).

AML, privacy, and personnel controls

• AML: anti-money laundering program concepts (high level).
• CIP: Customer Identification Program.
• KYC: Know Your Customer.
• Reg S-P: privacy of consumer financial information and safeguarding requirements (high level).
• Form U4 / Form U5: registration/termination forms; must be accurate and timely (high level).
• CE (Regulatory Element / Firm Element): continuing education requirements and tracking obligations (high level).
• Heightened supervision: increased oversight for higher-risk reps or conduct concerns; must be documented (high level).
• Noncash compensation: sales incentive controls; improper incentives can create supervision risk (high level).
• OBA / PST: outside business activities / private securities transactions (high level).
• Statutory disqualification: disqualifying events that can restrict association/registration (high level).