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Options Levels

Options levels and strategies have varying degrees of risk.

Most options brokers assign trading levels from 1 to 5; with 1 being the lowest and 5 being the highest. A trader with a low trading level will be fairly limited in the strategies they can use, while one with the highest will be able to make pretty much whatever trade they want.

In order to evaluate whether a specific investor understands the risks associated with each level of options trading, your experience, risk tolerance, and financial objectives must be evaluated.

Commonly Asked Questions

What are the Options Levels available at online brokerage firms?

Options trading levels, often referred to as option approval levels, are a system used by brokerage firms to classify their clients' ability to trade options contracts based on their financial knowledge, trading experience, and risk tolerance. These levels are designed to help ensure that traders have the necessary knowledge and financial resources to engage in more complex and potentially riskier options strategies.

Typically, there are four or five levels, ranging from level 1 to level 4 or 5, with higher levels allowing traders to engage in more advanced options strategies.

The exact criteria and requirements for each level may vary between brokerage firms, but here is a general overview of what each level typically allows:

  1. Level 1 - Covered Calls: This level is the most basic and usually allows traders to write covered calls. Covered calls involve owning the underlying stock and selling call options against it.

  2. Level 2 - Long Calls and Puts and Cash Covered Puts: At this level, traders can buy long call and put options, which are relatively straightforward strategies.

  3. Level 3 - Spreads and Debit Spreads: Level 3 typically permits traders to engage in more complex strategies, including credit and debit spreads. These strategies involve buying and selling options contracts simultaneously to create positions with limited risk.

  4. Level 4 - Uncovered Options: Level 4 allows traders to engage in uncovered or naked options strategies. These strategies involve selling options without owning the underlying asset. It's a higher level of risk and requires more substantial margin requirements.

  5. Level 5 and 6  (if available)

To gain access to higher options trading levels, traders typically need to meet certain criteria, which may include:

  • Completing an options trading application with the brokerage.
  • Providing information about their financial situation and investment experience.
  • Acknowledging an understanding of the risks associated with options trading.
  • Meeting minimum account balance requirements.

It's important to note that not all brokerages have the same options trading level system, and the specific requirements and available strategies can vary.

Traders should carefully review their brokerage's options trading approval process and contact their brokerage firm if they have any questions about options trading levels and strategies. Additionally, options trading can be risky, so it's essential to have a solid understanding of options before engaging in trading activities.

Options Risk Disclosure

Options involve a high degree of risk and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially significant losses. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

Please read "The Characteristics and Risks of Standardized Options