Level 2 Options Trading

What is Level 2 Options Trading?

If you’ve traded options before with a broker, you’ve probably noticed that there is varying levels of approvals. One of the most important approval criteria a trader can acquire is Level 2 options trading.

It varies by broker, but typically level 2 gives you access to intermediate options trading strategies. With level 2 approval, it’ll be hard to lose your life savings, since you typically aren’t naked any positions. Most of the horror stories you hear about online are from Level 3 or Level 4 trading.

What’s Included in Level 2 Options Trading?

1. Covered Calls: This is usually included in Level 1. Covered calls are considered to be very beginner friendly, since they have a fixed level of downside. The trader will sell (or “write”) call options while also owning the underlying stock. If the stock price doesn’t go above the strike price of the option, the trader can keep the premium. Downside is fixed to the cost basis of the stock, and upside is limited to the strike price plus the premium.
2. Long Options (Calls & Puts): Buying call or put options. A call option gives the holder the right, but not the obligation, to buy the underlying stock at a certain price within a certain period. Put options gives the holder the right to sell the underlying stock at a certain price.
3. Cash-Secured Puts: You sell a put option while also holding enough cash in your account to purchase the stock at the strike price. This strategy is great if you want to be paid for purchasing a stock you like. If you don’t mind being assigned, you get paid to wait until the stock drops to a cheaper price.
4. Spreads: Spreads involve buying and selling multiple options of the same stock with different strike prices or expiration dates. Spreads are an advanced strategy. Downside can be significant if you are inexperienced. Common spreads include vertical spreads, calendar spreads, and diagonal spreads. These strategies have a wide range of applications. Usually they are used to generate income or hedge other positions.

How Do You Get Approved?

To get approval for Level 2 options trading, an investor usually needs to do the following. This can differ by broker.

1. Usually brokers will ask you to take a test on options to show you aren’t an idiot. These tests are almost always very easy and easily gamed. Most brokers just want to avoid really bad press. It doesn’t look good for anybody if you get above your head in trading losses.
2. Have a certain account balance or net worth. Most brokers won’t let you trade options without at least 5 figures in your account (at a bare minimum).

It’s either retirement on a yacht or food stamps for me

Trader on the popular Reddit forum, Wall Street Bets

Higher levels (like Level 3 and Level 4) will allow you to trade way more complex strategies, like selling uncovered options and iron condors. In my opinion, this is where the real risk (and fun) is. Unless you’re naked on a trade, it’s hard to lose the farm.