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Getting started in options is sometimes a frustrating experience for new traders. One of the obstacles is the options approval form required by all brokerage firms. Basically, the compliance department within the firm must ensure that clients have a certain level of experience in trading before allowing clients to open accounts and place more complex trades. For some traders, however, these requirements are a catch 22; how can they become experienced in trading if brokers will not allow them to implement trading strategies? Yet, while this process is sometimes frustrating at the onset, there are relatively easy ways to resolve the dilemma and begin trading.  

Clients of brokerage firms are required to complete an options approval form when opening new accounts. The options approval form is designed to provide the brokerage firm with information about the customer’s experience, knowledge, and financial resources. According to the “know your customer” rule, options trading firms must ensure that clients are not taking inappropriate risks. Therefore, the new account form and the options approval document gather important background information about each customer.

Once the documents are submitted, the compliance officers within the brokerage firm determine which specific strategies are appropriate for the client. The process is designed to ensure that inexperienced traders do not take inappropriate risks. For example, if the option approval form indicates that the client has little or no options trading experience, the brokerage firm could potentially face regulatory and legal troubles for not knowing their customer if that inexperienced client goes on to lose money. So, each brokerage firm is required to understand the client’s experience level and financial background to ensure that the customer is not trading outside of certain parameters of suitability.  

An individual’s past options trading experience and financial resources will allow them to trade within certain strategy levels. For instance, level 1 strategies include relatively straightforward approaches like covered calls and protective puts. More complicated trades, however, require a higher level of approval. For example, the table below shows a typical breakdown a brokerage firm might use to group strategies by levels. Traders with a great deal of experience and significant financial resources can generally receive approval for level 5 trading. This would allow them to implement any type of trading strategy, including high-risk trades like naked calls and uncovered straddles.

Although the options approval levels can vary from one broker to the next, level 3 is enough for Optionetics students in most cases. Since Optionetics does not recommend uncovered selling of options, approval beyond level 3 is not really necessary. At Level 3, traders can use a variety of simple strategies like straight calls and puts, as well as more complex trades such as spreads, straddles, and butterflies.    

In order to avoid the frustration of opening account with a firm that will not allow trading in more advanced levels, new traders will want to find out the brokerage firm’s policy regarding options approval before funding an account. The best way to do this is to contact the firm’s options approval department by phone. If you have little or no experience, ask them what steps you need to take in order to trade the more complex options strategies (level 3). It sometimes helps to specify which trades—i.e. spreads, straddles, butterflies, etc. Often times, the firm will ask you to write a letter saying that you understand the risks involved with trading options. After that, most firms will allow you to fund the account and to begin implementing those options trading strategies that most interest you.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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