Options are the most powerful tool in the investment toolbox, but many people don’t use them.
Part of the reason is they don’t come standard with an investment account — you have to request, and sometimes beg, to add access to them.
I started my Weekly Options Corner to help everyone become confident in trading options. I want each of you to get to the point where you are grabbing your own triple-digit gains every month.
But for many, the first step is getting access to them in your account.
Today, we’ll break down how to do that, plus the levels you need access to for certain strategies you may want to follow.
Let’s dive in…
Test the Water First
If you are new to options, looking for a way to trade in what’s called a paper trade account could be extremely helpful. Basically, the brokerage sets you up with a fake account and already has fake cash deposited into it. Then you can use it to mimic real-time trades and track your performance. You get to go through the steps of placing trades and seeing how options move without putting your money at risk.
A shout out to Lourdes who wrote in this week looking for places to set up an account such as this.
A few brokerages offer it today, feel free to reach out to your current brokerage and see if they have a paper trade account available.
If they don’t you can check out a few other reputable sites that have a way to paper trade options: Thinkorswim, eOption, Interactive Brokers and TradeStation.
Your Broker’s Permission
We are running through a general setup for applying to get access to options today.
This is important, so please understand: Each broker is going to have different requirements, some more strict and some less strict. Figure out what options level you want and then work with your current broker since you are familiar with them to get access.
Today we’re going to give you an overview of what most brokers do, and how they break down their levels. But if you have questions about your specific broker, remember that you can always contact their customer service department.
Now, to open an options account in the real world with your broker, the first thing you have to do is request access. This is going to be a new application process at your brokerage. You’ll have to fill out a form with your account and personal information.
As you go through it, there are a few parts that get specific to options, and how you want to use them.
For example, it’s going to ask you what your investment objective is.
You can’t simply put “get rich.” Investing doesn’t work that way. The goal is to build a strategy and approach that grows your account over time, not just overnight.
There can be four or five choices here: conservative, moderate, moderate growth, growth and aggressive growth.
It’s best to be aggressive here. If you choose conservative, they can decline your access to certain levels of options. They will say it doesn’t fit your objective — even though it’s up to you how conservative you want to be.
So, don’t let a simple question like this stump your application. Always lean toward aggressive growth and it won’t hold you back.
Levels of Options Trades
Near the end of the application is where we get into the options level you need. This is the reason you are applying to begin with, now you have to make sure you get access to everything you want to do.
We have talked so far about buying call options and buying put options, but that’s not always the first level of options trading that you get access to.
Here are the four main levels at most brokerages (again, some brokerages may order them differently).
- Level 1 — Covered: Write Covered Calls and Write Cash-Secured Puts (Selling Options)
This level is first because it’s covered, which simply means you have the cash tied up for the trades or own the underlying stock. Writing in options lingo means selling.
It allows you to sell a call option on a stock that you already own or sell a put option on a stock that you want to own. Then the broker ties up the capital it may need. Selling options is a great way to use them for income.
If this sounds complicated, don’t worry. I’ll talk more about these in next week’s issue.
- Level 2 — Standard: Cash Purchase Options (Buying Options)
This is where you get into buying call options and put options — how we find triple-digit gains in the stock market. These are very straightforward, you just have to understand the risk — namely, that you can lose everything you pay.
That’s why even though they are the most basic and popular way to trade options, they sometimes end up at level two.
If your only goal with options is to buy them to potentially double your money on each trade, then this is the level you want access to. Everything above here just builds on these first two levels to create even more unique options strategies.
- Level 3 — Standard Margin: Option Spreads
Option spreads are a very fun and profitable way to trade options, but they require a deeper understanding and more patience.
Spreads let you essentially place multiple option trades at one time — buying and selling calls and puts at different strike prices, and sometimes different expirations.
We’ll get into spreads down the road, specifically about why you would use one spread over another in certain situations.
- Level 4 — Advanced: Write Uncovered Options (Selling Options)
This is the highest level of options trading, selling uncovered puts and calls. I think writing uncovered puts should be a couple levels lower, if I’m honest, while writing uncovered calls should be the most advanced level.
You would look to sell uncovered options when you are aggressively looking for income. When you sell something, you get paid. Just make sure you understand the risks that come with the option you are selling. Again, we’ll talk about selling calls and puts in next week’s issue.
But we’ll have more on that in the coming weeks though.
Where We Go From Here
After finding the level you want for the strategy, likely level two, then file your application and wait to hear back.
Some brokers ask you questions to see what you know about options. Or they may have account balance requirements for certain levels.
But, if all you want to do is buy call options and buy put options, that should be one of the basic account types that you should have no problem getting access to.
Again, a lot of brokers start with buying options as their level one package. So, it just depends on what your brokerage has for each level.
In the next few weeks, we’ll dive into more details about the strategies mentioned in the different levels, including one of my favorite ways to trade options (hint: it’s in level four).
And after that, we’ll shift to applying what we know about options in practice to bring it all home. We’ll show you real trades you can make yourself.
Don’t forget to send us anything you’d like us to cover about options to WinningInvestor@BanyanHill.com.
Chad Shoop, CMT
Editor, Quick Hit Profits