Before you will be able to buy and sell options in your online brokerage account, you will first have to enable your brokerage account to trade options. My experience trading options has been primarily with Etrade, however most brokerages have a similar process you have to go through to enable you to trade options.
To enable your online brokerage account so you can trade options you need to fill in an Options Upgrade form. For Etrade you can fill the form in online by logging on to your account, clicking the Accounts tab, clicking Forms & Applications, and then clicking Options Upgrade (for a non retirement account) or clicking Options Upgrade - IRA (for a retirement account). You can also fill in a paper copy of the Options upgrade form by clicking here.
The Options upgrade form is quite straight forward, the only question that confuses people is the options activity level you are applying for. For Etrade, the options activities levels are below:
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Level 1 |
Write Covered Calls. |
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Level 2 |
Write Covered Calls, buy Call and Put options. |
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Level 3 |
Write Covered Calls, buy Call and Put options, spreads, and uncovered Put options (requires a margin account). |
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Level 4 |
Write Covered Calls, buy Call and Put options, spreads, uncovered Put options, and uncovered Call options (requires a margin account). |
I would recommend you apply for options activity level 2. The reason for this is that with level 1 you can sell calls against the stock your already own (Covered Calls) only. With level 2 and you can sells calls against the stock you already own AND buy calls which may be of use to at some point. With Etrade (and probably most other online brokerages) once you have been granted a certain options activity level, you can't apply for an increase in options activity level for 3 months! Hence the reason I suggest you apply for level 2 now even though you may not want to buy calls immediately.
Getting options activity level 2 is straight forward enough, and I've never heard of anyone being refused it. After submitting your options upgrade form, the brokerages usually approve it within 3 business days.
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