Opening an Option Trading Account
If you haven’t yet received my free report on options trading, I urge you to do so. If you already have, congratulations! I think you’ve made a wise decision. Options provide any type of investor with the ability to reduce risk and enhance returns.
But first things first. Before you can take advantage of the many income benefits options offer, you must be authorized to trade options. Many stock investors, once they are ready to include options in their trading strategies, are shocked to discover that they cannot make an option trade because their stock brokerage accounts do not authorize them to trade options. The cold, hard truth is that merely opening a stock brokerage account does not authorize option trading. To trade options, you must expressly request authority from your broker.
Quick and Easy Process
The good news is that getting authorized for options trading is easy and usually takes less than five minutes to complete. For online investors who are opening up a new account, merely check a box to indicate that you want options trading authorization in addition to stock trading. The online account application will then simply add a couple of pages of questions on options.
For investors with existing stock trading accounts that want to add options trading, you simply request an upgrade from your broker. Some brokers let you upgrade online whereas others will require you to fill out a form and send it in. An example of a form can be seen by clicking here. In either case, once you have submitted the required information, the broker will take a few days to process your request and inform you what options trading level you have been assigned (more on trading levels a bit later).
Options Trading Authorization Questions
The information you must submit to the broker to obtain options trading authorization falls into one of four different categories:
1. Investment Objectives
- Aggressive Growth
Your best chance for a high trading level authorization is if you put down “speculation” as one of your objectives. Many option traders simply check off all of the investment objectives listed. But even if you put down only “income” as an objective you will still probably be authorized for covered calls, which is a good and conservative options strategy.
2. Trading Strategies
- Buy Stock * Selling Puts
- Long Calls/Puts * Short Stock
- Covered Calls * Selling Naked Calls
- Debit Spreads * Mutual Funds
- Credit Spreads
The more option trading strategies you check off as being of interest to you, the better your chances of getting a high trading level authorization. If you only select “buy stock” and “mutual funds,” you won’t get anywhere so be sure to check off more choices than those two. At the very least, check off “covered calls” and “selling puts.” Feel free to check off all of the strategies listed.
Even if you don’t plan on using them now, after some education you may change your mind and it would be good to have your authorization locked and loaded when you decide you want to pull the trigger. So, the more option strategies checked the merrier!
3. Trading Experience
- Years of Stock Trading Experience
- Number of Trades Per Year
- Average Size Per Trade (# of shares and/or dollar amount)
- Years of Options Trading Experience
- Number of Trades Per Year
- Average Size Per Trade (# of contracts and/or dollar amount)
Don’t be shy when answering this question. The more years trading stock and options, the higher your trading level authorization will be. The average size per trade is less important, but a larger trading size number might tip the scales slightly in favor of a higher trading level.
4. Personal Finances
- “Liquid” Net Worth (Investments easily sold for cash – your home doesn’t count)
- Total Net Worth
- Annual Income
- Source of Income (Job, Investments, Pension)
Higher is better, but honesty is always the best policy.
Option Trading Levels
Every broker is different, but a typical breakdown of option trading levels is as follows:
Level 1: Covered calls
Level 2: Long calls and puts
Level 3: Spreads (both debit and credit)
Level 4: Short equity puts
Level 5: Short equity calls
Level 6: Short index calls and puts
Personally, I never do trades involving level 5 and level 6 because they involve too much risk and are unnecessary for good returns. Achieving Level 4 is good enough for almost any options trader.
Highly-Rated Options Brokers
Barron Magazine’s annual ranking of online brokers is a valuable informational resource for investors looking for a broker. Below is a list of five highly-rated options brokers:
- Ally Invest (no account minimum)
- Tastyworks (no account minimum)
- Fidelity ($2,500 minimum)
- Thinkorswim by TD Ameritrade ($3,500 minimum deposit)
- Interactive Brokers ($10,000 minimum)
Note: Federal regulations require that all brokers impose a $2,000 minimum to trade on margin, including credit spreads.
I personally use thinkorswim, but any one of these five is great. I don’t get compensated for mentioning any of these brokers and I offer them up simply to provide you with some names that you can research further. I also suggest that you read the Barron’s brokerage ranking to get more possible brokerage names to consider.
Raising Your Authorization Level
If you’re not initially granted authorization to trade spreads, consider paper trading. Several of the trading platforms, including TD Ameritrade’s thinkorswim and Interactive Brokers, allow you to do “paper trades” as a way to practice options trading using fake money. Paper trading is a great way to increase your trading experience (and confidence!) so that you can reapply for a higher trading level than you were initially granted.