Before you can trade options, your broker must approve your brokerage account for options trading. In an options agreement, opening options will need to provide information that will assist your broker in determining your knowledge of options and trading strategies, as well as your general investing knowledge and your financial opening options to bear the risks of options trading. Based on the information you provide, your broker will determine whether options trading is suitable for you and, if so, what types of options trading may occur in your account.
Trading Levels The information you provide in your options agreement allows your brokerage firm to determine which option trading levels, if any, you qualify for in your account.
These trading levels determine the types of option trades you can execute in your account. Broker-dealers generally offer 5 levels of option trading representing varying degrees of risk.
Level 1 generally represents the lowest level of risk, while level 5 generally represents the highest level of risk. The types of option trading that occurs at each level and even the number of levels may vary among brokerage firms.
You may ask your brokerage firm to provide you with a list and description of each option trading level it has available for its customers. Make sure you read this publication and carefully consider the information in it before you begin trading options.
Additional Resources This bulletin provides a general overview of the steps an investor must take to open an options trading account with his or her broker-dealer.
For more specific details on how to open an options trading account, investors should contact their broker-dealer.