An investor’s option approval outlines what strategies may be utilized in a specific account type. Options trading activity in an individual brokerage account, such as a cash or margin account, or a retirement account such as a traditional IRA or Roth IRA, is limited by the account’s authorization level.
Individual brokerage accounts allow for the broadest range of investment types (stocks, options, ETFs, mutual funds, bonds, futures, and forex) and the highest level of options trading authorization.
Retirement accounts can also have a wide range of investment types--including options--but may have restrictions in trading authorization, such as the ability to only trade defined-risk strategies.
Trading level authorization requirements vary by broker and account type, experience, funded capital, and an investor’s goals. Most brokers break down options trading authorization by different levels that describe the amount of risk (defined or undefined) inherent in the authorized strategies.
Each broker might have different names or authorization specifics, but one example might be the following:
Generally, the highest level of authorization available for investors in retirement accounts includes approval for covered calls, cash-secured puts, long call and put buying, covered puts, and spreads. Taxable margin accounts may have the highest level of option authorization.
Your option approval level depends on your answers to questions on your broker’s options account application, such as income, net worth, experience, and investment objectives.