How much equity do you need to trade options?
Wednesday, September 8th, 2010 at
8:49 pm
I applied for options trading on my brokerage account and was only approved for covered calls.
How much equity or liquid net worth is needed to trade level 2 options? I believe this is why i was denied…
Filed under: Retirement Planning
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Options are cash settlement
Each broker has different requirements of money in the account, resources of the investor, and trading experience. It could very well be a money availability issue if you can’t purchase long options. There is no risk to the broker when you’re long options as the risk is only the amount invested.Trading short options is a different matter.
I hesitate to state the obvious, but why don’t you ask them?
This depens on Money and Riskmanagement Rules. A general rule says, that you should never risk more than 2-3% per trade. So 5% is already very mu ch. If you have 1000$ you set a stop loss for about 30-50 $ . Dont forget, the less starting capital you have, the more transaction costs are important.
It’s not so much the equity as it is the credit score of the applicant(oh yes!) and the years of trading that they have you down as doing and of course whether or not you apply for a margin account(you can only get level 3 and level 4 accounts with a margin account). And of course it also depends on how stingy and overcautious the broker is. I’m pretty new at stocks and the first broker I signed up with was sharebuilder/ing. Now those guys rejected my margin application and as a result only allowed me to trade level 2 options. I have tens of thousands in unsecured credit card lines but sharebuilder denied me a measly 2:1 margin LOC and gave me a piddly $25 overdraft on my checking account lol. I wasn’t happy with sharebuilder obviously especially after I discovered realtime trades were not $4 but rather $9.95 with them so I signed up with sogotrade who offer $3 per equity trade with an additional $0.70 per option contract.
https://www.sogotrade.com/Setup/Default.aspx?rf=392837
Oh and the 100 free trades for new signups didn’t hurt either lol. Now I may sound biased and I have no idea which broker you have right now but based on my own bitter experience I would suggest you give sogo a try. They approved me for a level 4 Options account weeeeeee!
Other then them I suggest you give optionshouse and optionsxpress a look but I personally have not applied at either of the two so I have no idea how reasonable they are but since "options" is there middle name I would hope for good stuff and if I weren’t so happy with sogo I would be trying one of them next.
As a note, I have not yet tried *writing* any options because I intend to educate myself on risk management and the greeks before I take that plunge but from the looks of it the fees that sogo charges options underwriters are quite reasonable. Oh and I forgot to add you only need $500 deposited at sogo to get red carpet treatment, speaking from personal experience. I added more later though.