{"id":6432,"date":"2017-06-22T07:30:00","date_gmt":"2017-06-22T07:30:00","guid":{"rendered":"https:\/market-minute\/faq-how-to-start-trading-options\/"},"modified":"2017-06-22T07:30:00","modified_gmt":"2017-06-22T07:30:00","slug":"faq-how-to-start-trading-options","status":"publish","type":"post","link":"https:\/\/jeffclarktrader.com\/market-minute\/faq-how-to-start-trading-options\/","title":{"rendered":"FAQ: How to Start Trading Options"},"content":{"rendered":"

\tHappy Thursday.<\/p>\n

\tThe stock market closed yesterday in pretty much the same condition it closed on Tuesday. The S&P 500 is trading right on its 9-day exponential moving average.<\/p>\n

\tFrankly, I don’t have anything new to offer to my comments from yesterday. Everything I wrote in yesterday’s Market Minute<\/em><\/a> still applies today.<\/p>\n

\tSo, rather than opine on the current market setups, let’s open up the mailbag and respond to the most frequent question I’ve received from new subscribers this week…<\/p>\n

\n

\t\tDear Jeff: I just subscribed to your Delta Report<\/em> and I’m excited to start trading options. But, I don’t have any experience in the option market. And, my broker requires some level of experience before it will approve my account for trading options. How can I open an option trading account without any experience trading options?<\/p>\n<\/blockquote>\n

\tIt might help to understand why “experience” is required for approval of an options trading account.<\/p>\n

\tIn 1987, just before the October crash, the only requirement most firms had for approving full trading in options accounts was you had to be able to fog a mirror. In other words, if you were breathing, then you were approved for pretty much any option strategy you wanted to trade.<\/p>\n

\tIn September 1987, option premiums started to inflate. Many brokerage firms sold uncovered put options on broad stock market indexes – like the S&P 500 and S&P 100 – and they recommended their clients do the same. The premiums were so large, it would have taken a “crash” to lose money on those trades.<\/p>\n

\tOf course, the stock market did crash on October 19, 1987. The uncovered put trades that so many brokerage firms recommended to their clients were hugely underwater. And, since the margin requirements for that sort of trade at the time were quite mild, traders were way overleveraged on their positions.<\/p>\n

\tThey were sitting on HUGE losses. And in many cases, their accounts did not have enough money to buy the index at the price they agreed to.<\/p>\n

\tThey had negative equity – which means they could close their positions and still not have enough money in their accounts to absorb the loss.<\/p>\n

\tIn that case, the brokerage firm is liable.<\/p>\n

\tIn other words… If the brokerage firm lets you take on a position you can’t handle, then the brokerage firm has to make good on the trade.<\/p>\n

\tNo brokerage firm ever wants to be put in that situation again. So, they’ve set up restrictions on folks who want to open option trading accounts. You have to show that you have some experience trading options. And you have to have the financial capability to handle the risk.<\/p>\n

\tAlmost every brokerage firm will approve new accounts for selling covered call options – which is a conservative strategy – and for buying speculative call and put options, as long as you have the money in the account to do so.<\/p>\n

\tAt most firms, this is considered “Level 1” trading. It’s available to anyone who wants to trade options. As long as you have the cash available to make the trade, there aren’t any restrictions.<\/p>\n

\tGetting approval to sell uncovered put or call options takes a little more work. While these sorts of trades are often lower-risk than buying or shorting the underlying stock, the brokerage firm is ultimately liable to fulfill the contract if you don’t have the funds to do so. That’s why the firms have more restrictive requirements.<\/p>\n

\tTo overcome this objection, you may need to call your broker. Pick up the phone and tell your firm exactly what it is you want to do. For example, if you want to sell uncovered put options on TEVA Pharmaceuticals, then make sure you have enough cash available in your account that you can buy the stock at the price you’ve agreed to. In this situation, most firms will approve your account for selling uncovered put options.<\/p>\n

\tSelling uncovered put options is lower-risk than buying the underlying stock itself. If your brokerage firm doesn’t grasp this simple concept, and they’re not willing to approve your account for this sort of trade after you’ve discussed your intentions with them, then find another brokerage firm.<\/p>\n

\tIn my experience, Interactive Brokers and TD Ameritrade have no problem at all approving accounts for the type of trading I recommend in the Delta Report<\/em>. I’m sure there are other firms that will approve accounts for my sort of trading.<\/p>\n

\tAgain, pick up the phone. Tell your brokerage firm what it is you would like to do. They shouldn’t have any trouble approving your account for the sorts of trades we do in the Delta Report<\/em>.<\/p>\n

\tBrokerage firms want your business. If you explain your trading objectives in a way that reduces the firm’s exposure to risk, you should easily gain approval for advanced option trading. Otherwise, look for a more accommodating firm.<\/p>\n

\tBest regards and good trading,<\/p>\n

\t<\/p>\n

\tJeff Clark<\/p>\n

\tP.S. <\/strong>Keep sending me your questions right here<\/a>. I’ll answer the most frequently asked ones here in the Market Minute<\/em>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Let\u2019s open up the mailbag and respond to the most frequent question I\u2019ve received from new subscribers\u2026<\/p>\n","protected":false},"author":28,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"ep_exclude_from_search":false,"service":"","footnotes":""},"categories":[1],"tags":[],"publication":[10],"person":[7],"newsletter-type":[],"ticker":[],"class_list":["post-6432","post","type-post","status-publish","format-standard","hentry","category-market-minute","publication-market-minute","person-jeff-clark"],"acf":[],"ai_tts_audio_outdated":false,"ai_tts_legacy_post":false,"_links":{"self":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/6432","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/users\/28"}],"replies":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/comments?post=6432"}],"version-history":[{"count":0,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/6432\/revisions"}],"wp:attachment":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/media?parent=6432"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/categories?post=6432"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/tags?post=6432"},{"taxonomy":"publication","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/publication?post=6432"},{"taxonomy":"person","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/person?post=6432"},{"taxonomy":"newsletter-type","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/newsletter-type?post=6432"},{"taxonomy":"ticker","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/ticker?post=6432"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}