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What Levels of Options Trading Do I Need?

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Written by Timothy Sykes
Updated 4/21/2023 11 min read

The question of what level of options trading you need isn’t up for debate. It’s a question for your broker…

If they only give you Level 1 clearance, that’s what you need…

A level of options trading that suits your experience and risk tolerance.

Why? Because options trading has a steeper learning curve than stock trading. It’s a popular trading niche, but there’s more risk. I’ve seen new traders blow up their accounts all the time.

And if you can’t be profitable with simple strategies, there’s no way you’ll find sustained success with more advanced strategies.

I don’t trade options, but I’ve learned about them from watching my former student Mark Croock. He’s an instructor in my Trading Challenge, as well as in his own Evolved Trader program. Most of his $4 million career earnings are from options trades.

What’s the difference between options trading levels? Which level suits you? Read on to learn all about it!

What Factors to Consider Before Getting Into Options Trading

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Different types of traders need different trading levels. How do you determine the trading level that suits you? That depends on what you want to get from options trading.

Here are several factors to consider before trading options:

Trading Goals

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Every trader’s got something to shoot for. Define your goals well before starting options trading.

Trading without a clear goal makes you more vulnerable to bad decisions. Why? Because greed and emotional trading take over — and those are a trader’s worst enemies.

Risk Tolerance

Your risk tolerance differs from other traders. Maybe you’re comfortable making big leaps for large potential profits. Or maybe you’d rather trade conservatively, even if the returns are smaller.

Different types of options have different risk levels. Your risk tolerance will define which type of option you’ll trade the most.

Trading Plan

Trading without a plan is just gambling. You’ll make random trades that’ll probably lose you money.

That’s why you need a trading plan. And this plan needs to be tailor-made to fit your goals and risk tolerance.

Current Financial Situation

Your current financial situation matters. It dictates how much money you can spend on trading. Don’t trade money you can’t afford to lose — that’s an easy way to go broke.

New to options trading? Check out my articles on buy-to-open orders and why options trading is risky.

How to Get Options Trading Approval

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The procedure for options trading approval differs for every broker. But most of them have this in common — they don’t allow you to trade options right off the bat.

Brokers do this because options trading can be risky for both the trader and their broker.

Options trading usually isn’t unlocked by default. You need to be approved for trading options. Requesting approval usually entails completing an application form, where you answer questions about your trading experience, goals, personal finances, and what options strategies you’d like to trade.

It usually takes one or two business days for the broker to review your form. If you get approved, you’ll start at the level of options trading your broker approves you for. You can apply for level upgrades later as you gather more experience.

Some online brokerages allow you to make options transactions right off the bat. All you need to do is apply for options trading while creating your account. Check with your broker for specifics if you’re planning to trade options.

What Are Options Trading Levels?

Options trading levels are phases of permissions set by a broker. Each trading level represents a set of options strategies. And each options approval level is more complicated than the last.

Brokers give you gradual access to options strategies. Why? Because advanced strategies rely on more leverage than you may know how to handle.

Options trading restrictions protect newbie options traders from themselves. 

There are no standard criteria for trading level eligibility. Each options broker has different considerations and may have varying approval criteria. Check with your preferred broker for more details.

The trading level hierarchy also differs from broker to broker. One options broker may have a three-level system, while another has a five-level system.

There’s one common thread. The lowest approval level will have basic strategies. And the highest approval level will have the most advanced strategies.

Here’s a look at a common four-level options trading approval scale:

Level 1: Covered Positions

Most brokers start inexperienced traders at Level 1. This level has covered positions, which include covered calls and covered puts.

Here’s what these two positions entail:

  • Covered calls: Buying a covered call will let you sell a stock you own at an agreed-upon strike price before or on a specified expiration date. You can also write covered calls to get extra income when selling stocks. Traders buy covered calls when they think share prices will rise.
  • Covered puts: A covered or cash-secured is in some ways equivalent to a short position. Like covered calls, you can also write covered puts to get money from the options premium when somebody buys the contract. Traders buy covered puts when they think market prices might fall.

Level 2: Long Options

At Level 2, you get access to buying long options positions. Long calls and long puts are some of the most common types of options contracts. Here’s what they do:

  • Long call: This is the standard call option contract. Buying a long call means you have the right to buy a stock at a certain strike price before or on its expiration date. You exercise a long call when the share price exceeds the strike price. It’s best used if you think a stock’s price will rise in the future.
  • Long put: A long put option gives you the right to sell a stock at a certain strike price before its expiration date. It becomes executable when the stock price falls below the strike price. This means you can sell the stock at higher prices, then buy it again at a lower price, like a short sale. Long puts are best used if you think stock prices will fall in the future.

When you buy long options positions you have the right to exercise the option, not an obligation. Even if the option’s asset price hits its strike price before expiration, you don’t have to execute.

Depending on how far away the option’s expiration is, you may choose to sell the option to another option buyer. Or you can just let it expire — the only money you’ll lose is the premium.

What’s a strike price? Read more in my post about strike prices in options trading.

Level 3: Option Spreads

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Most brokers allow intermediate traders to access options spreads. An options spread is a more advanced strategy for experienced traders.

Here, you trade multiple option contracts for the same underlying security. These contracts should have different strike prices and/or expiration dates.

Traders often use spreads to hedge their bets, limiting risk. But option spread trading also limits their maximum gains.

Here are two common types of strategies on this level:

  • Vertical spread: A vertical spread means you buy multiple options contracts. These contracts have different strike prices but expire at the same time. This creates a “Plan B” when the stock price doesn’t hit the price threshold you’d originally projected.
  • Horizontal spread: In a horizontal spread, you buy long- and short-term options. These options have the same strike prices but different expiration dates. This gives you a chance at more modest gains from your long-term options to offset losses of premiums from your short-term options.

There’s also a combination strategy called a diagonal spread. Most brokers restrict access to spreads because there are a lot of moving parts. They can be an awesome strategy, but they can also lead to overtrading.

Read my post about option spreads to learn more about this strategy.

Level 4: Uncovered Calls and Puts (Naked Options)

Most brokers lock uncovered options until the final level. Uncovered or naked calls and puts can have potentially unlimited loss potential. That’s why these trades are restricted to the most advanced, and well-resourced, options traders.

Writing an uncovered call is like a covered call. You’re selling the right to buy a certain stock at an agreed-upon strike price and expiration date.

The key difference between covered and uncovered calls is the stock ownership. In naked calls, you don’t hold any shares of the underlying security.

The best-case scenario for a naked options writer is for the options to expire. This means you can receive money from the premium without buying any stock.

What happens if the option holder exercises their contract? The naked options writer needs to buy the stock for them.

The worst thing that could happen here is if the prices are far beyond the strike price. This is where you’ll potentially experience unlimited losses.

This dynamic is similar in buying uncovered puts. Like short selling, you’ll be on the hook for buying the stock if the option is exercised.

Unlike short selling, options contracts are multiplied by 100.

Never forget what I think about newbies short selling…

Thankfully, brokers don’t let new traders close to these strategies.

How to Move Up an Option Trading Level

Increasing your options approval level is different with every broker. But the most common way is to request an upgrade. You can usually do this through a menu on the broker’s website or app.

Most brokers require you to complete another application form for a level upgrade. Answer all the questions, and wait for the broker to review your application. If you’re approved, you can start trading new strategies.

Read my guide to choosing the best options broker so you know what’s ahead of you.

Key Takeaways

The level of options trading you need depends on your trading goals and risk tolerance. You also need trading experience for more advanced options trading strategies.

How do you build trading experience? Learn from experienced options traders. I’ve got a great way you can do just that — sign up for Mark Croock’s Evolved Trader program!

When you sign up for Evolved Trader, you’ll be learning from a skilled teacher — as well as a damn good options trader. Mark’s guidance and mentorship will help you level up in more ways than one, and deal with the obstacles that every options trader faces on the way.

What level of options trading are you approved for? Let me know in the comments!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”