What you need before you can trade options

You cannot trade options through a regular brokerage account. You need a brokerage account that has been approved for options trading, and the approval level depends on your experience and what strategies you want to use. Most brokerages require you to open an account, pass a background check, and answer questions about your investment knowledge and financial situation before they grant options approval.

The approval process typically takes a few business days. Some brokerages offer multiple approval levels — Level 1 might allow you to buy call and put options only, while Level 2 or higher allows you to sell options or use more complex strategies. You choose which level to request, and the brokerage decides whether to grant it based on your answers.

Once approved, you can place options trades through the same platform you use for stocks. You will need to fund your account with cash before you can trade. The amount varies by strategy: buying a single option contract might require $200 to $500, while selling options typically requires significantly more cash held in reserve.

Key Takeaways

  • You must open a brokerage account and receive options approval before placing any options trade, which usually takes a few business days.
  • Brokerages offer different approval levels that determine which strategies you can use, from buying calls and puts to selling options.
  • You need cash in your account before trading, with the amount depending on whether you are buying or selling options.
  • Options contracts expire on specific dates, so you must monitor your positions and decide whether to close, exercise, or let them expire.
  • Each options contract represents 100 shares of the underlying stock, so a contract price of $2 costs $200 to buy.

Opening and funding a brokerage account

Start by choosing a brokerage firm. Common brokerages that offer options trading include Fidelity, Charles Schwab, E*TRADE, Interactive Brokers, and Tastytrade, though many others exist. Visit the brokerage's website and look for the account opening section — it is usually labeled "Open an Account" or "get your free guide."

You will provide your name, address, Social Security number, employment information, and annual income. The brokerage runs a background check and verifies your identity. This step typically takes a few minutes to complete online, though the brokerage may contact you by phone or email if they need clarification.

After your account is created, you can request options approval. On the account settings page, look for "Options Approval" or "Trading Permissions." You will answer questions about your investment experience, how long you have been investing, and which options strategies interest you. Answer honestly — brokerages use this information to set your approval level, and misrepresenting your experience can result in your approval being revoked.

Once approved, deposit money into your account through bank transfer, wire transfer, or check deposit. The funding method and time vary by brokerage — bank transfers typically take three to five business days, while wire transfers settle the same day.

Understanding options approval levels

Brokerages use a tiered system to control which strategies traders can use. Level 1 approval allows you to buy call options and put options only. This is the most basic level and is usually the easiest to obtain. You can profit if the underlying stock moves in your predicted direction, but you cannot sell options or use strategies that involve multiple legs.

Level 2 approval adds the ability to sell covered calls — selling call options on stock you already own. This strategy generates income but limits your upside if the stock rises sharply. Level 2 is typically granted to traders with some experience and sufficient account value.

Level 3 approval allows you to sell cash-secured puts — selling put options while holding enough cash to buy the stock if the option is exercised. This strategy generates income but requires significant cash reserves. Level 4 approval, the highest tier at most brokerages, allows spreads and other complex multi-leg strategies. Level 4 is usually reserved for experienced traders with larger accounts.

You can request a higher approval level at any time by updating your options permissions in your account settings. The brokerage will review your request based on your updated experience and account size. Some brokerages automatically upgrade your level after you meet certain criteria, such as account value or trading history.

How to place your first options trade

Log into your brokerage platform and navigate to the options trading section. Most platforms have a dedicated "Options" tab or search bar where you can enter the stock symbol you want to trade. Search for the stock — for example, "AAPL" for Apple.

The platform will display the options chain, a table showing all available call and put options for that stock. The columns show the strike price (the price at which you can buy or sell the stock), expiration date, bid price (what buyers will pay), ask price (what sellers want), and other data like implied volatility and Greeks.

Choose the expiration date and strike price that matches your strategy. For a first trade, many traders start with an expiration date one to three months away and a strike price near the current stock price. Click on the option you want to buy. The platform will show you the current bid and ask prices and let you enter the number of contracts you want to purchase.

Enter the quantity (usually starting with one contract), review the total cost (remember: one contract = 100 shares, so a $2 option costs $200), and submit the order. Your order will be sent to the market. If the price matches, the trade executes when ready. If not, your order sits in the queue until someone accepts your price or you cancel it.

Managing your position after you buy

Once you own an options contract, you have three choices before expiration: sell the contract to close your position, exercise the option to buy or sell the underlying stock, or let it expire. Most retail traders sell to close rather than exercise, because selling lets you capture whatever value remains in the contract.

Check your position regularly — options lose value as expiration approaches, especially if the stock price moves against you. You can see your current profit or loss in your account dashboard. If you want to exit early, go back to the options chain, find the same contract you bought, and click "Sell to Close." This sells your contract back to the market at the current bid price.

As expiration approaches, your decision becomes more urgent. If your option is in the money (profitable), you must decide whether to sell it, exercise it, or let it expire and be exercised automatically. If it is out of the money (worthless), it will expire with no value and you will lose your entire investment in that contract. Some brokerages automatically exercise in-the-money options at expiration, while others let them expire worthless — check your brokerage's policy.

Cash requirements and margin rules

The amount of cash you need depends on what you are trading. Buying options requires only the cost of the contract itself. If you buy one call option for $2 per share, you need $200 in your account (one contract × 100 shares × $2).

Selling covered calls requires you to own 100 shares of the underlying stock for each contract you sell. If you own 100 shares of Apple, you can sell one covered call. You do not need additional cash, but the shares are held as collateral.

Selling cash-secured puts requires you to hold cash equal to the strike price times 100. If you sell a put option with a $150 strike price, you must have $15,000 in cash in your account, even if the option expires worthless. This cash is held in reserve and cannot be used for other trades.

Some brokerages allow margin — borrowing money to trade — but margin for options is complex and carries significant risk. Most new traders should avoid margin until they understand how it works. Check your brokerage's margin requirements and interest rates before using borrowed money.

Common mistakes to avoid when starting

One of the most common mistakes is not understanding expiration dates. Options expire on a specific date, and after that date they are worthless. Set calendar reminders for your expiration dates so you do not forget to close or exercise your positions.

Another mistake is trading options on stocks with low volume or wide bid-ask spreads. If few people are trading a particular option, the bid price (what you can sell for) may be much lower than the ask price (what you must pay to buy). This gap eats into your profits. Start with options on large, popular stocks like Apple, Microsoft, or Tesla, where bid-ask spreads are tight.

New traders also often risk too much on a single trade. A common rule is to risk no more than 1 to 2 percent of your account on any single trade. If your account is $10,000, risk no more than $100 to $200 per trade. This protects you from wiping out your account on a few bad trades while you are learning.

Finally, avoid overcomplicating your first trades. Start by buying call options if you think a stock will rise, or buying put options if you think it will fall. Once you are comfortable with those basic strategies and have made several trades, explore more complex strategies like spreads or selling options.

Frequently Asked Questions

Do I need a minimum account balance to trade options?

Most brokerages do not have a formal minimum, but you need enough cash to cover the cost of the options you want to buy or the collateral required if you are selling. Some brokerages require a minimum account balance of $500 to $2,000 to open an account, though this varies. Check your chosen brokerage's requirements before opening an account.

How long does options approval take?

Most brokerages approve options trading within one to three business days of your request. Some approve when ready if you meet their criteria. You can check the status in your account settings or contact customer service to ask. Once approved, you can place trades when ready.

What happens if I do not close my option before expiration?

If your option is in the money at expiration, most brokerages automatically exercise it — meaning you will buy or sell the underlying stock. If it is out of the money, it expires worthless and you lose your investment. Check your brokerage's expiration policy, as some brokerages let you opt out of automatic exercise.

Can I trade options on any stock?

No. Options are available only on stocks that have enough trading volume and interest. Most large-cap stocks have options, but many small or newly public companies do not. When you search for a stock in your brokerage platform, you will see whether options are available for it.

What is the difference between a call option and a put option?

A call option gives you the right to buy the underlying stock at a set price. You buy a call if you think the stock will rise. A put option gives you the right to sell the underlying stock at a set price. You buy a put if you think the stock will fall. Both expire on a specific date and lose value over time.