A breakdown of option approval levels one through four

Options level. Option Approval Levels Explained

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    options level

    For instance, if a trader owns shares of a stock, then they could purchase a single put contract and nothing more. By the way, this is generally the only level that most brokerages will approve for IRAs individual retirement accounts.

    options level

    Level 2 Option approval level 2 is an incremental improvement over the previous level. At this level, a trader is permitted to perform both strategies listed in Level 1, as well as going long on calls and puts. 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. Level 3 Option approval level 3 involves spreads regardless of whether they are diagonalhorizontal options level vertical.

    However, the same cannot be said for being long or short on a spread. If one is shorting a horizontal spread without sufficient funds in his or her account, the broker would automatically reject that order. Once again, there is limitation on each of these different levels options level option approval. Shorting something without ownership belongs to the next level.

    options level

    Level 4 Option approval level 4 is known as uncovered selling or naked shorting. At this level, short selling is possible, as well as many different types of ratio spreads. This article originally appeared on The Options Insider Web site.

    options level