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Opening an Options Trading Account

Congratulations on your decision to join Options for Income. You’ve made a wise choice. Options provide any type of investor with the ability to reduce risk and enhance returns.

If you know that you already have options trading authorization from your broker, and you know that you can trade spreads, feel free to skip this article. Additional new-member guidance is found here

Getting Authorized to Trade with Options for Income

Before you can take advantage of the many income benefits options offer, you must be authorized to trade options. Merely opening a stock brokerage account does not authorize option trading. To trade options, you must expressly request authority from an options 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.

There are many options brokers to choose from. Big brokerages like Vanguard and T. Rowe Price aren’t necessarily the best platforms for options trading. You can compare the options trading platforms here and watch Options for Income trades being placed here to see which interface you might prefer. (Investing Daily does not endorse one platform over another.) Feel free to call any of them on the phone. Ask if they’re running any promotions so that you can get better pricing or some other advantage. You’ll find that most are eager to get your business and will answer any question you can think of except this critical one: They won’t tell you which options to trade. That’s what you’ll get from Options for Income!

If you have an existing stock trading account and decide to add options trading to that account, simply request an upgrade from that broker.

Some brokers let you apply online whereas others will require you to fill out a form and send it in. Once you have submitted the required information, the broker may approve you immediately or may take a few days to process your request and inform you what options trading level you have been assigned (more on trading levels below).

To fund the options margin account, some brokers have minimum deposit amounts and Federal regulations require a balance of $2000 for an account to trade on margin.

Options Trading Authorization Questions

The information you’ll submit to the broker to obtain options trading authorization falls into four different categories:

1.    Investment Objectives

  • Speculation
  • Aggressive Growth
  • Growth
  • Income

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. 

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 select only “buy stock” and “mutual funds” you won’t get anywhere, so be sure to check off more choices than those two. Here at Options for Income, we usually trade “spreads.” Even if you don’t plan on using some of the listed strategies now, after some education you may change your mind and it would be good to have your authorization in place 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)
  • Number of Trades Per Year
  • Average Size Per Trade (# of contracts and/or dollar amount)
  • Years of Options Trading Experience

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

Jim never does 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. 

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 Charles Schwab’s OptionsXpress, 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. Read more about paper trading here.