When you open your first option trading account (or add option capability to an existing equities brokerage account), your broker assigns you an options approval level. Usually the levels run from Level One to Level Five. Your approval level determines which option strategies you are allowed to use in that account.
The idea behind the approval level structure is that the riskier an options strategy is, the more options experience and/or capital should be required. Here is a typical list of approval levels and the types of trades allowed:
Level 1 – Covered Calls, Protective Puts (i.e. option positions that also include a position in the underlying stock)
Level 2 – Level 1 items plus speculative call and put buying (i.e. buying calls alone as a bullish speculation, or buying puts alone as a bearish speculation)
Level 3 – Level 2 items plus debit spreads (i.e. positions involving more than one option, where the maximum loss is the original net debit paid. For example, bull call...
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