How To Get Level 2 Options Approval: Simply buying and selling stocks is fine for beginners, but perhaps you are ready to try more sophisticated strategies. That means it is time to look at buying and selling options. These are a bit more complicated, and under some circ*mstances, they carry unexpected levels of risk.
In an effort to keep investors from getting in over their heads, you willfind that there are four levels of options trading. Gaining approval to move through the levels requires verification that you meet certain basic eligibility guidelines.
But first – what are options?
What Are Options?
Buying and selling stocks is a straightforward concept – it’s like buying and selling anything else. You use cash or credit to make your purchases, and you try to get the lowest price possible. When you sell, the goal is to sell for more than you paid so you can make a profit.
Buying and selling options is an entirely different concept. Options are contracts that give the holder of the contract the right – but not the obligation – to buy or sell shares of a givensecurity at a predetermined price (the strike price).
Options are good for a set amount of time, so options holders must decide how they will proceed before the option expires.
Call options offer the contract holder an opportunity to buy shares at the price stated in the contract. Put options are just the opposite – they allow the contract holder to sell the asset at the price stated in the contract.
Investors who sell call and put options charge a premium to the individual who purchases the contract. If the option expires with no action, they pocket the premium and walk away.
What Is Level 2 Option Trading?
Options trading carries risks that buying and selling stocks do not. Brokerage firms work to prevent risk to themselves and their account holders by limiting options trading activity until certain criteria are met.
Level I options trading accounts allow investors to perform low-risk options transactions: covered calls and cash-secured puts. Those with Level I permissions can trade covered call options, which means they already own the shares listed in the option contract, so there is no doubt they can deliver if the option is exercised.
Cash-secured puts are the same concept, but for the other type of option. The investor who trades the put has the cash on hand to buy the shares outlined in the options contract if the holder of the contract elects to exercise the option.
Level 2 options trading offers a bit more leeway in terms of what investors can and cannot do with options. Specifically, Level 2 options approval permits investors to buy calls and puts on stocks that support options, as well as exchange-traded funds (ETFs).
Can You Sell Options with Level 2?
Level 2 options trading doesn’t allow investors to sell additional types of options beyond what is permitted at Level 1.
When investors achieve Level 2 options approval, they retain the ability to trade covered calls and cash-secured puts, but riskier options strategies remain restricted.
What Can I Do With Level 2 Options?
The short answer to “what can I do with Level 2 options approval” is this:
- Sell covered calls
- Sell cash-secured puts
- Purchase calls
- Purchase puts
It’s also helpful to note what investors cannot do when they reach Level 2 options approval because some strategies remain out of reach. For example, option spreads must wait until Level 3 options approval because it is necessary to have margin access – essentially credit with the brokerage – to perform such trades.
The final level, Level 4 options approval, allows the highest-risk options transactions. Examples include the ability to sell naked calls and naked puts. These types of trades can lead to massive losses, so they are most appropriate for expert investors.
How Do I Get Level 2 Options Approval?
Specific eligibility criteria for gaining Level 2 options approval can vary from brokerage firm to brokerage firm. The three main factors that contribute to this decision include your level of experience, the size of your account, and your margin – the credit extended to you by the firm.
In most cases, your brokerage account will have instructions available through the options section on the site. You can also check the FAQ or Help pages.
The process typically begins with a request initiated by you. There is a brief form that asks about your level of experience, your options-related goals, and similar. Whether and how you have used your Level 1 access may play a role in the decision, as well.
How Get Level 2 Approval at tastyworks
There is a simple process for tastyworks users to get Level 2 approval. Once you have signed into your account, begin by visiting the Account Status section. Only margin accounts can be upgraded, so be sure that’s what you have. If your account type is cash, you will have to open a margin account before proceeding.
If you have the correct account type already, you shouldsee an orange button that says “Upgrade”. If you don’t see the button, or if you aren’t given the option to upgrade to the level you want, it may be necessary to update your profile.
Your eligibility is entirely dependent on the self-reported information in the Trading Objectives, Trading Knowledge, and Financial Standing sections.
How Get Level 2 Approval at Robinhood
The process for how to get Level 2 approval at Robinhood is similar to the process at tastyworks. Log into your account, then choose the “Account” button on the top right corner of the screen. Choose “Settings”, then scroll to the “Options Trading” section. Select “Enable”, which will prompt a series of questions.
Your answers to these questions, which cover your experience, your trading objectives, and your financial status, will determine which level is assigned to you. If it isn’t the level you had in mind, you will receive a detailed explanation so that you can work through any experience or education issues and reapply.
How To Get Level 2 Options Approval: Final Thoughts
Keep in mind that if your honest answers to screening questions don’t result in reaching the options trading level you had in mind, be patient. The levels are in place for your protection. While some investors succeed in getting around the criteria by submitting inflated figures or exaggerated responses, this rarely results in a positive outcome.
Certain options strategies carry virtually unlimited risk. Diving into them before you have the expertise to protect your assets can create financial disasters.
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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
