How to Remove Restrictions on Stock Options

A stock option is one way to participate in the stock market.

Stock options are contracts that trade publicly in the open markets and are based on the prices of actual stock. These contracts offer the buyer the right to purchase stock (a "call" option) or sell stock (a "put" option) at a pre-specified price any time before the stock option expires. Brokers restrict who can trade stock options. They also restrict the type of stock option trading permissible on approved stock option accounts. You can remove these restrictions on stock options in various ways. However, there are no guarantees that your broker will do as you want, and sometimes it takes multiple tries to remove the restrictions.

Things You'll Need

• Brokerage account

Instructions

1. Apply for options trading in your brokerage account if you are restricted from any stock options trades. By default, most brokerage accounts do not allow options trading. Before you can trade stock options, you must indicate on the application that you understand the risks of these volatile financial products. Additionally, you must indicate your previous background or knowledge of stock options. The broker takes this information into consideration when removing restrictions for stock options trading in your account.

2. Request a higher stock options trading level if the stock options strategies you wish to trade are unavailable due to account restrictions. Even if your brokerage account provides you with stock options trading, it may not offer access to certain option techniques. Most brokers use a multilevel system for option restrictions. If you have successfully traded stock options at a lower level already, you may often reapply to have your level increased so you can try other options strategies.

3. Purchase shares of stock to cover your obligations as a "call" options seller if you wish to remove restrictions for this type of options trading. Brokers rarely allow clients without substantial stock options experience the permission to sell "call" options outright. This is called "naked selling" and is highly risky. It obligates your brokerage account to potentially sell stock at the terms of the "call" options. To minimize the risks, all you need to do is buy 100 shares of the stock for each "call" options you sell and keep these shares for as long as you keep the option position open. This is called a "covered call" and it removes restrictions on selling call options.

Tips & Warnings

• If your broker denies your request to trade options or your request for a higher option trading level, request the reasons why. This information is not usually provided in a broker's response. You can re-apply later if you know the reasons. For example, you may simply need to deposit more funds in your account to cover the risks.

• Stock options trading is among the most risky forms of investing. Broker restrictions exist for a reason. You can quickly lose money in a very short period of time by trading options.

References

• ETrade: Help Center: Get started with options
• Optionetics: Understanding Trading Levels
• Fidelity: What are the different levels of option trading available at Fidelity?
• Fidelity: Option Agreement
• Fidelity: What are the requirements for selling calls?