written by: Brian Nelson•edited by: Rebecca Scudder•updated: 6/28/2009
Stock options can be a useful and powerful investing tool for savvy investors. However, trading stock options is a little bit more complicated than just trading stocks, plus, you’ll have to get your trading account approved first.
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Requirements to Trade Stock Options
Many investors are surprised to discover that they can’t just trade stock options right away in their regular brokerage account.Because of the extra risk associated with trading stock options, both online brokerage accounts and traditional brokerage accounts must be approved for trading options first.
Getting an investing account approved to buy and sell stock options is relatively simple.However, the process can take a few days so it is important to get your account approved to trade options before you want to start executing orders to buy calls, puts, or straddles.
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Stock Option Accounts Are Margin Accounts
First, ensure that your brokerage account is a margin account.A margin account is simply an investing account that is authorized to have a margin loan.While there are various rules and requirements associated with margin accounts and trading on the margin, margin loan is basically a loan made to a client by a broker within their stock trading account.
Like all loans, there are interest expenses and other potential costs with a margin loan.The interest rate for a margin loan depends on the brokerage and is often tiered according to how much money is in the margin account.
Regardless of whether or not you intend to trade on the margin or use the margin loan, all option trading accounts must be margin accounts due to some of the intrinsic properties of stock options.So, if your account is not a margin account, you’ll need to get it approved as a margin account along with getting it approved as an option account.
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Option Trading Approval
In order to get approved to buy or sell calls, puts, and other options in your account, you have to sign some additional paperwork which states that you understand that option trading is risky and that you are aware of that risk.You will also be required to state that you have received and read Characteristics and Risks of Standardized Options, a brochure put out by the Options Clearing Corporation.
Finally, you will be required to answer a questionnaire about your trading and investing experience.Based upon your answers to this survey, your accounts will be authorized for a certain level of trading with the riskiest strategies and techniques reserved for only experienced investors.
Once your account is approved to trade options, you can issue buy and sell orders just like you do for stock trades using either an online order entry system, or by speaking with your broker.