In order to trade options, you must submit an options approval form to your broker. The form requires you to fill out certain information that helps the broker decide if you have adequate trading experience as well as sufficient liquid net worth. The brokerage firm will not release these figures to you as many people are tempted to just fill out the forms with the information they’re looking for. This only hurts the investor. But if you are approved for options trading that is only the beginning. The broker will then assign an “option approval level” to the account based on the answers given on the application.
There are generally four different levels of option approval levels although some firms use five. But the standard in the industry is to use a zero through four scale with the following meanings:
Level 0 is approved for:
· Covered calls (buying stock and selling calls)
· Protective puts (buying puts to protect stock in the account)
· Cash secured puts (writing puts with the full strike price available in cash)
· Covered puts (shorting puts against short stock)
Level 1 is approved for all strategies in a Level 0 plus:
- Long calls (outright purchase of a call)
- Long puts (outright purchase of a put)
Level 2 is approved for all strategies in a Level 1 plus:
- Spreads (buying one option and selling another)
Level 3 is approved for all strategies in a Level 2 plus:
- Naked calls (outright sale of a call)
- Naked puts (outright sale of a put)
It looks like your broker has assigned your account a “level one” approval. This can always be changed at a later date but generally your broker will want to see some additional experience, say six months or so, before they will “upgrade” the account to a higher level.
Some of the newer, more progressive firms like Think or Swim assign everyone equal approval levels. As long as you have sufficient equity to meet the margin requirement, you can place any trade you'd like.