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What Are Options Trading Levels?

Let us know in the comments Probably because people often use it as one on Reddit. You will keep your shares, and you can sell another covered call on the position. This requirement applies to all eligible account types for spread trading. They do matter in the rankings of the show and I read each and every one of them!

Options approval levels are options trading restrictions placed on your brokerage account to prevent or allow you from entering different options strategies. Most new traders, and admittedly some experienced traders, often don’t know which trading level they are in or even that levels exist.

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Required Needs to be a valid email. What Are Options Trading Levels? Start the conversation Leave a Reply Click here to cancel reply. You may choose from these hot topics to start receiving our money-making recommendations in real time. Don't forget choose a topic. Gold and Silver Alerts. Interested in other topics? You can add more alerts below. Stock Market Crash Insurance. Wall Street Scam Watch. The reason these are reserved for Level 2 is that you can lose money on the option positions.

If you believe the underlying is going to move higher, you purchase a call. If you think the underlying will move lower, you buy a put. When you begin to trade long options, you will start getting into the more intricate parts of options.

Options, by their nature, are much cheaper than purchasing stock. This is a great bonus, especially for smaller portfolios, because now you can do more with less.

The problem is doing too much more. Options have a defined life-span so losses can add up quickly if you are not careful. Spreads open a whole world of possible option strategies: When you move to this level, you must have an account with margin.

You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you'd be able to normally. To trade on margin, you need a margin account. This is different from a regular cash account, in which you trade using the money in the account. Margin, if used carelessly, allows you to lose more money than what your account can afford.

Now, before you swear off margin completely, know that with Option Level 3, all strategies are defined risk. You cannot lose more than what is in your account.

Spreads are going to require a lot more legwork and education to be able to master. There are a lot of moving parts when trading multiple leg strategies strategies that involve buying or selling more than one option at a time. Even though they are difficult and on margin, spread strategies should not be ignored. These are some powerful strategies made available to you. It is a good idea to learn to utilize them in your trading.

Options Level 4 is typically the highest level you can obtain. Sometimes, brokerages will break the two strategies in here into Option Level 4 and Option Level 5. The strategies that are locked behind this door are margin strategies with undefined risk, short calls, and short puts.

Both of these strategies allow you to lose more than what is in your portfolio, so they should only be attempted by an experienced options trader. With short calls and short puts also comes short strangles and short straddles.

These can be great neutral strategies used to profit when the underlying is in a tight range. Sometimes, short calls will be moved to the next level, Option Level 5. Short calls pose more of a risk than short puts. Theoretically, an underlying can only drop to zero-dollars, meaning the risk is limited.

Calls, on the other hand, can climb to infinitely. Stocks are more likely to run higher and to do it unexpectedly. A buyout announced overnight, or a new CEO is taking control of a company, can trigger an extraordinary run in the stock. Although debit spreads involve writing options without a corresponding position in the underlying security, the losses are limited by having multiple positions on options contracts based on that same underlying security.

For example, you could create a debit spread by writing call options on a particular stock and buying call options on the same stock. Again, there's not a huge amount of risk associated with these trades, but the higher trading level is required due to the additional complexities of creating spreads. For the creation of credit spreads, where you receive an upfront credit and are exposed to future losses if the spread doesn't perform as planned, you would normally need an account with trading level 4.

This is because potential losses are more difficult to calculate. Trading level 5, being the highest, would basically give you the freedom to make whatever trades you wanted. You would, however, usually be required to have a significant amount of options margin in your account.

There's no specific way to guarantee an increased trading level with your broker. Some brokers may review your account periodically and automatically increase it if appropriate, but this is quite rare.

You would usually have to contact your broker directly and request an upgrade, but this would be entirely at the discretion of your brokerage firm. If you had a solid trading history with them and a reasonable amount of funds on account, then you would probably stand a good chance of being upgraded. Trading Levels at Options Brokers In the previous article in this guide, we discussed the importance of choosing the right online options broker.

On this page we explain these levels in more detail, covering the following: Section Contents Quick Links. The Purpose of Trading Levels The purpose of trading levels, also known as approval levels, is essentially to provide a form of protection to both the broker and the customer. How Trading Levels are Assigned When you sign up with an options broker, you will usually have to provide detailed information about your finances and previous investments that you have made.

What Each Trading Level Allows Most options brokers assign trading levels from 1 to 5; with 1 being the lowest and 5 being the highest. Increasing your Trading Level There's no specific way to guarantee an increased trading level with your broker.

What You Should Know About Option Trading Levels

Option approval level 4 is known as uncovered selling or naked shorting. (I like to use the word “exposed” instead of “naked,” especially when I am talking about spread trading, which. What You Should Know About Option Trading Levels. Details Written by Adam Beaty. Share on Facebook Share. Share on Twitter Share. Share on Google+ Share. It is a good idea to learn to utilize them in your trading. Option Level 4. Options Level 4 is typically the highest level you can obtain. Sometimes, brokerages will break the two. Detailed information on the different trading levels that options brokers offer options traders, and how they affect the trades you can make. Trading Levels at Options Brokers. you would normally need an account with trading level 4. This is because potential losses are more difficult to calculate. Trading level 5, being the highest.