Getting Started: Options Trading Approval And Choosing Your Online Broker
If you’re thinking about trading options for the first time, there is some important information that you need to find out before getting started.
For starters, picking the right trading platform/online broker and getting the proper approval is key. Let’s cover some of the basics you will need to know in order to select the right broker, get approval for trading options, and trade effectively.
Getting Approval From Your Broker
There are five levels of approval with brokerages, and each is associated with different options strategies. When you are approved for a level, you will have trading authority for strategies approved at that level as well as lower levels. Most brokers will start you off with a level 2 approval as long as you have a basic understanding of how options work. Here’s a basic breakdown…
|Brokerage Approval Levels|
|Level 1||Covered calls and protective puts|
|Level 2||Long calls and long puts|
|Level 3||Covered puts and debit spreads|
|Level 4||Credit spreads|
|Level 5||Naked options writing|
Each broker sets their own criteria for approving the different account levels. In general, experience and net worth are the most important factors that determine your approval level. Approval will be based on the information you provide on your brokerage account application.
Most investors who dabble in options will only need to be approved to buy, or go “long,” options, which is a level 2 or 1 at some brokerages. Be sure and list all market experience you have when answering your broker’s questionnaire so they can get an accurate idea of your background and give you proper approval. Be honest and upfront when doing this task — it’s ultimately in your best interest.
Choosing A Brokerage/Trading Platform
As you select your broker, be sure and get details on their commission structure, software, and whether the data you’ll be receiving is real-time. Ask them about their fee structure and discounts if you’re funding a new account – many brokers offer incentives for you to trade with them.
Most brokerages allow you to open an option account with relatively simple paperwork, most of which can usually be done online. Trading options is generally allowed in most IRA accounts, but be sure to verify this with your broker of choice, as policies can vary.
Once you’ve selected a broker, it’s a good idea to “paper trade” a few times using their platform. That way you can become familiar with how everything works and where all the features are. This is a great time to contact their trading specialists if you have any questions about the process or notice something that doesn’t seem right. There’s nothing worse than wanting to make a trade and not knowing precisely how to do it.
|Brokerage Pricing & Contact Information|
Commissions are only one of the costs associated with a trade. But they are important and should be one of the determining factors in deciding which broker to use. In addition to commissions, there are a variety of other fees that may add to the cost of the trade. Do your research on this… They can be higher at some brokers, and other fees can be added, such as confirmation fees and processing fees.
Finally, the spread between the bid and the ask price is another cost. For example, the bid on an option may be $0.90 and the ask could be $0.95. Market buy orders are completed at the ask price, and sells are completed at the ask. Buying at the market (for $0.95) and selling at the market (for $0.90) in this example would be a loss of $0.05 per contract.
Bid-ask spreads are a product of the stocks themselves. But some brokerages such as Interactive Brokers and OptionsHouse make markets in some stocks and may allow for you to be filled in-between the bid and ask prices. The more volume a stock or ETF has, the more liquid and tight the option spreads will be.
Trading options can be lucrative. But it’s important to know the ins and outs of your brokerage’s platform before you begin trading. Also, pay attention to costs – it’s a crucial part of successful trading. Using a lower-cost broker and limit/stop orders is an easy way to reduce costs.
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