What are the levels of Option Trading Permissions?
There are Two lower levels of option trading permissions, Level 1 and 2, in order to be able to offer option trading to those who currently would not qualify for Limited or Full option trading permissions. Limited permissions are now referred to as Level 3, and Full permissions are considered Level 4.
What account type is needed to trade options?
Option trading permissions may be available for Margin, Cash and IRA/Retirement accounts.
A Margin account may request any level of option trading permissions (1-4). A Cash or IRA account may only request levels 1-3, and full payment may be required for all call and put purchases.
Traders who maintain either a cash or margin type account must maintain net liquidating ($Value depending on their broker) in order to establish or increase an existing uncovered options position
The type of option strategies available to trade will depend on the level of option permissions approved on the account. For examples of the various levels and types of option combinations allowed in each level are as follows:
Level 1 – Covered calls, i.e. short call vs long equal quantity of underlying, are allowed.
Covered Call/Covered Basket Call – Buy Write
Level 2 – Covered Options Positions as defined by FINRA Rule 2360 are allowed with the additional restriction that the expiration date of the long option must be on or after the expiration date of the short option in a spread.
Long option positions – Long Call – Long Put – Covered Put – Protective Call – Protective Put – Long Straddle – Long Strangle – Conversion – Long call spread – Long put spread – Long Iron Condor – Long Box Spread – Collar – Short Collar
Level 3 – Option strategies that have limited maximum potential loss are allowed.
Short Put – Synthetic -Reversal – Short Call Spread – Short Put Spread – Short Iron Condor – Long Butterfly – Unbalanced Butterfly – Short Butterfly – Calendar Spread; Debit – Diagonal Spread; Short leg expires first
Level 4 – All option strategies are allowed.
Short Naked Call – Short Straddle – Short Strangle – Short Synthetic – Calendar Spread; Credit – Diagonal Spread; Long leg expires first.