However, the same cannot be said for being long or short on a spread. ... On TD Ameritrade’s basic mobile app, there is a top menu with Level II as one of the options… When a person opens an account, the broker assigns them one of several option approval levels supposedly based on the option trader’s knowledge and needs. Option approval level 3 involves spreads regardless of whether they are diagonal, horizontal or vertical. For instance, if a trader owns 100 shares of a stock, then they could purchase a single put contract and nothing more. At this level, a trader is permitted to perform both strategies listed in Level 1, as well as going long on calls … Financial Market Data powered by FinancialContent Services, Inc. All rights reserved. This article originally appeared on The Options Insider Web site. For instance, Level 3 allows not only for spread trading, but also for going long on calls and puts which were included in Level 2. I usually mark a long position with a plus in parentheses, while for a short position I use a minus sign. Once again, there is limitation on each of these different levels of option approval. I have also added another column for abbreviation. Occasionally, one of the positions could become uncovered or exposed, so if I say I have a “naked leg,” it does sound odd.). The table below presents universal industry guidelines in terms of strategies commonly associated with each level. Thus, each level is cumulative. 2020 InvestorPlace Media, LLC. Copyright © 2020 InvestorPlace Media, LLC. All rights reserved. Option approval level 2 is an incremental improvement over the previous level. 7 Augmented Reality Stocks To Buy Now For The Future, Louis Navellier and the InvestorPlace Research Staff, 8 Stocks for Uncertain Election Directions, Investing During Coronavirus: Stocks Close Lower Ahead of Further Vote Counting, 19 Election Stocks to Buy if Joe Biden Wins in 2020, 10 Cheap Stocks to Buy in November Under $10, 7 High-Yield Dividend Companies to Invest in During the Pandemic, Nio’s 100 kWh Battery Launch Event: 3 Takeaways for NIO Stock. Option level approval is a commonly overlooked area of option trading. Option approval level 2 is an incremental improvement over the previous level. At the first option approval level, an option trader is permitted to do covered calls, as well as “long protective puts.” Now there is a catch to it; at this level a trader is not allow to buy any calls, but is allowed to buy puts only in the amounts he or she holds, and also only on the specific stock that he or she owns. I suggest that anyone who is uncertain of their option approval level contact his or her broker to find out which level of option approval their account has. At any rate, there is no official standard of what strategies could be traded at which level. (I like to use the word “exposed” instead of “naked,” especially when I am talking about spread trading, which involves multiple positions, also known as legs. Single opportunity could 16X your investment starting next week. In many instances, the students in the Options Trader courses I have recently taught did not know what level of approval they had, and a few students were unaware that the levels even existed. At this level, a trader is permitted to perform both strategies listed in Level 1, as well as going long on calls and puts. If one is shorting a horizontal spread without sufficient funds in his or her account, the broker would automatically reject that order. At this level, one is allowed to perform the outright purchase of a call or put on either optionable stocks, exchange-traded funds (ETFs) or even indices.
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