Options Approval Levels and Your First Trade

FINRA Rule 2360 bars a broker from accepting an options order until the account has been approved for options trading, which means your first trade starts with a form, a document to read and a decision the firm makes about you before you’ve placed anything.

What the rule asks of the broker

Under Rule 2360, the firm has to learn the essential facts about you before it approves the account: your financial situation, your investment experience and what you’re trying to achieve. Approval is a decision the firm makes and records. It isn’t automatic. It can also come with limits.

The same rule covers the disclosure that comes with it.

The disclosure document

The document runs long. Don’t let that put you off, because the sections on the risks of buying options and the risks of writing them are short and pointed, and they say in formal terms what the earlier lessons showed with numbers: a buyer can lose the entire premium in a short time, and a writer of uncovered calls faces losses with no limit.

Read those two sections at least. Keep the file.

Approval levels

Most brokers sort options approval into tiers. The number of tiers and what each one allows vary by firm, so read your own broker’s table, but the ladder usually climbs in order of how much money a position can lose.

Typical tier	Usually allows
Lowest	Covered calls on shares you own, protective puts
Next	Buying calls and puts
Middle	Spreads, where one option limits the risk of another
Highest	Selling uncovered calls and puts, usually in a margin account

Everything in the first three lessons sits low on that ladder. You don’t need more to start. Your current level usually shows in the account settings or profile, and some firms state it in the approval notice itself, so look it up before assuming an order will be accepted.

Filling in the application

The application asks about your experience with stocks and options. It also asks your income, net worth, liquid assets and goals for the account. Answer truthfully.

It’s tempting to round your experience up to get a higher tier. Don’t. The answers are how the firm judges what you can reasonably handle, and overstating them can get you approved for strategies whose losses your account can’t absorb, while leaving you with no argument later that the approval was wrong. If you’re turned down for a tier, you can usually reapply once your experience or finances change, and in the meantime the account can still hold stocks and whatever lower-tier trades the firm did approve.

A plan for the first trade

Keep the first one small and fully written down before you place it. Three rules do most of the work.

• One contract.
• Defined risk, meaning a bought call or put.
• A written exit: a loss price, a gain price and a closing date.

Here’s what that looks like on a hypothetical stock.

Why a time exit? Extrinsic value drains fastest in the final weeks. That decay is the whole argument for buying calls with more time than your idea needs, and a time exit is the simplest defense against it on a first trade, when you have no feel yet for how fast a premium can shrink. Why one contract? Because the point of the first trade is to learn how fills, quotes and your own nerves behave, and one contract teaches that as well as ten. Scaling up comes later. How many options contracts to buy sets out the sizing.

Paper trade first

Many brokers offer a simulated account. It costs nothing. Run the plan there, all the way to the exit. Check the payoff against the options profit calculator as the position moves.

One caution about paper fills. A simulator may fill you at the midpoint when a real order on a wide spread wouldn’t fill there, so treat paper results as a rehearsal of the process.

That completes the course. The glossary and analysis pages on the options topic page take it from here, starting with time decay, early assignment and the risks of the short side, which are the subjects a first real trade tends to raise soonest.