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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Sales Practices and Investors Protection Services

A client with a small portfolio and limited knowledge of options wants to sell naked index call options because the premium looks attractive. Which approach by the sales person is most consistent with sound sales practices?

The sales person should explain the unlimited loss potential and margin requirements of selling naked calls and assess suitability before proceeding. Promising certain income or guaranteed protection is misleading, and executing without explanation breaches the duty to disclose risks to the client.

  1. AExplain the unlimited loss potential and margin requirements, and check suitability before proceedingCorrect
  2. BEncourage the trade because premium income is certain
  3. CAssure the client that the exchange guarantees against losses
  4. DExecute without explanation to save the client's time

Explanation

Sales practices require disclosure of risks and suitability assessment. A short call has theoretically unlimited loss, and margins and MTM apply. Premium income is not certain and the exchange does not guarantee profits or protect against trading losses.

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