The tiered permissions a broker assigns before allowing options strategies, escalating from covered calls to spreads to naked short options, based on stated experience and finances.
Brokers must have reasonable grounds to believe a customer can evaluate the risks of the strategies they are approved for, and must deliver the standardised options risk disclosure document before the first trade. Approval is recorded on the account and reviewed when a customer asks to move up.
Levels vary by firm but follow a pattern: long options and covered calls first, then debit and credit spreads requiring margin, then cash-secured and naked short puts, then uncovered calls with the largest equity minimums.
The information you supply drives the decision, which is why exaggerating income or experience to reach a higher level undermines any later complaint. Approval is also where the suitability analysis for options actually happens in practice.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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