You need a brokerage account, permission from your broker, and a basic understanding of how options contracts work before you can place your first trade
Trading options requires three things in order: a brokerage account that permits options trading, approval from your broker at a specific options level, and enough cash or buying power to meet the contract's requirements. Most brokers will not let you trade options on day one — they require you to request options trading permission, answer questions about your experience, and sometimes wait a few business days for approval. Once approved, you can place an options order during market hours, but the mechanics of the trade itself — how you enter the order, what price you pay, how the contract settles — differ from stock trading in ways that matter to your money.
Key Takeaways
- You must open a brokerage account first, then request options trading permission separately; approval is not automatic and can take several business days.
- Your broker will assign you an options level (usually 1 through 4) that determines which strategies you can use — level 1 typically allows only covered calls and protective puts, while higher levels unlock spreads and naked options.
- Each options contract represents 100 shares of the underlying stock, so the premium you see quoted is the price per share, and you multiply by 100 to get the total cost.
- You need enough cash or margin buying power in your account to cover the full cost of the contract or the collateral your broker requires, which varies by strategy.
- Options trade during regular stock market hours (9:30 a.m. to 4 p.m. Eastern) and settle in cash or shares two business days after the trade date.
Opening a brokerage account and requesting options permission
Start by opening a standard brokerage account with a firm that offers options trading. Most major brokers — Fidelity, Charles Schwab, E*TRADE, Interactive Brokers, TD Ameritrade, and others — permit options, but smaller or specialized brokers may not. When you open the account, you will answer questions about your investment experience, income, and net worth. These questions are required by the SEC and FINRA, not invented by the broker to screen you out.
Once your account is open and funded, log in and look for a section called "Account Settings," "Permissions," or "Trading Permissions." You will find an option to request options trading permission. Click it and answer a second set of questions about your options knowledge and trading goals. The broker uses your answers to assign you an options level. This is not a test you can fail — the broker is documenting your stated experience so they have a record if a trade goes wrong. Answer honestly about what you actually know, not what you wish you knew.
Approval typically takes one to three business days. Some brokers approve when ready if you meet their criteria; others review applications manually. Check your email and your account dashboard for the approval notice. Once approved, you will see options chains (lists of available contracts) when you search for a stock symbol.
Understanding options levels and what you can trade at each one
Your broker assigns you a level from 1 to 4, sometimes with a level 0 for no options permission at all. The level determines which strategies you can execute. Level 1 is the most restrictive and is often the default for new traders.
| Level | Strategies Allowed | What This Means |
|---|---|---|
| Level 1 | Covered calls, protective puts | You can sell call options only if you own 100 shares of the stock, or buy put options to protect shares you own. |
| Level 2 | Spreads, cash-secured puts | You can sell put options backed by cash in your account, and buy and sell calls or puts in combination (spreads). |
| Level 3 | Naked calls, naked puts | You can sell call or put options without owning the underlying stock or holding cash to cover them. This is high-risk. |
| Level 4 | All strategies, including spreads and naked options | Unrestricted options trading; available only to experienced traders and usually requires higher account minimums. |
If you are approved for level 1 only and want to trade spreads, you must request a level upgrade. Contact your broker's options desk or submit an upgrade request through your account settings. Brokers often grant upgrades after a waiting period or if you demonstrate additional experience.
How to read an options chain and place your first trade
When you search for a stock symbol in your broker's platform, you will see a link to "Options" or "Options Chain." Click it and you will see a table with columns for strike price, expiration date, bid price, ask price, volume, and open interest. The strike price is the price at which the contract can be exercised. The expiration date is when the contract stops trading and settles. Bid is what buyers will pay right now; ask is what sellers will accept.
To place a trade, click on a specific contract (for example, a call option with a $50 strike expiring in two weeks). Your broker will open an order entry screen. You will see the current bid and ask prices. Enter the number of contracts you want to buy or sell — remember that one contract equals 100 shares — and choose your order type. A market order executes when ready at the current ask price (if buying) or bid price (if selling). A limit order lets you specify the price you are willing to pay or accept, and it waits until someone matches that price or the order expires.
Review the order summary, which shows the total cost or credit. For a call or put you are buying, the total cost is the premium (price per share) times 100 times the number of contracts. For example, if a call costs $2.50 per share and you buy one contract, you pay $250 plus any commissions. Click "Submit" or "Send Order" to place the trade.
Understanding the cash and margin requirements for options trades
The amount of money you need in your account depends on the strategy. If you are buying a call or put, you need cash equal to the full premium cost. If you are selling a covered call (selling a call while owning 100 shares), you do not need additional cash — the shares you own serve as collateral. If you are selling a cash-secured put, you need cash equal to the strike price times 100 times the number of contracts. For example, selling one put with a $50 strike requires $5,000 in cash or margin buying power set aside.
Your broker calculates the margin requirement — the amount of buying power reserved for the trade — automatically. You can see this in your account summary under "Buying Power" or "Available Margin." If you do not have enough buying power, the order will be rejected. Some brokers allow you to use margin (borrowed money) to meet these requirements; others require cash only. Check your account settings or call your broker to confirm your margin policy.
What happens after you place an options trade
Once your order is filled, you own or are short the contract. Your broker will send you a confirmation email with the trade details: the symbol, strike price, expiration date, number of contracts, price per share, and total cost or credit. This confirmation is your receipt.
The contract will appear in your "Positions" or "Holdings" section. You can see its current market value, which changes throughout the day as the underlying stock price moves and as time passes. If you want to close the position before expiration, you can sell it (if you bought it) or buy it back (if you sold it) at any time during market hours. If you hold it until expiration, the contract will either expire worthless, be exercised automatically, or settle in cash, depending on the contract type and whether it is in the money. Your broker will handle the settlement and send you a statement showing the final outcome.
Common mistakes to avoid when starting out
The first mistake is trading options before you understand how they work. Options are leveraged — a small move in the stock price can cause a large percentage gain or loss in the option's value. Paper trading (using a simulator with fake money) for at least a few weeks before risking real money is worth the time.
The second mistake is confusing the premium price with the total cost. If an option is quoted at $2, the total cost for one contract is $200, not $2. Many new traders miss this and are shocked by the bill.
The third mistake is holding options until expiration. Options lose value as expiration approaches, especially if they are out of the money. Selling or closing the position days or weeks before expiration often locks in a better price than waiting for the final day.
The fourth mistake is selling options without understanding the risk. Selling a call or put is a bet that the stock will not move past a certain price. If it does, you can lose far more than the premium you collected. Start with covered calls (selling calls while owning the stock) to limit your risk.
Frequently Asked Questions
How long does it take to get options trading permission?
Most brokers approve options permission within one to three business days. Some approve when ready based on your account profile. Check your email and account dashboard for the approval notice. If you do not hear back within five business days, contact your broker's customer service.
Can I trade options with a small account?
Yes, but the size of your account affects what you can do. Each options contract requires cash or margin equal to the premium (if buying) or the strike price times 100 (if selling a put). With a $1,000 account, you can buy one or two cheap options or sell one cash-secured put on a low-priced stock. Larger accounts give you more flexibility.
What is the difference between a call and a put?
A call gives you the right to buy the stock at the strike price. A put gives you the right to sell the stock at the strike price. Buying a call is a bet the stock will go up; buying a put is a bet it will go down. Selling a call is a bet the stock will stay flat or go down; selling a put is a bet it will stay flat or go up.
Do I have to exercise my options contract?
No. Most options traders close their positions by selling the contract back before expiration rather than exercising it. Exercising means converting the contract into shares, which triggers a stock purchase or sale and may have tax consequences. Closing the position is usually simpler and faster.
What happens if I forget about an options trade and it expires?
If your option expires in the money (profitable), your broker will exercise it automatically, converting it to shares or a cash settlement. If it expires out of the money (worthless), it straightforward disappears from your account and you lose the premium you paid. Your broker will send you a statement showing what happened.