Option approval level 3 involves spreads regardless of whether they are diagonal, horizontal or vertical. In many instances, the students in the Options Trader courses I have recently taught did not know what level of approval they had, and a few students were unaware that the levels even existed. However, the same cannot be said for being long or short on a spread. However, it does to take time to do it. The higher levels allow the trading of the strategies listed in the lower levels. For instance, if a trader owns 100 shares of a stock, then they could purchase a single put contract and nothing more. Option approval level 4 is known as uncovered selling or naked shorting. Faxing the paperwork might expedite the process a bit. Shorting something without ownership belongs to the next level.
The table below presents universal industry guidelines in terms of strategies commonly associated with each level. Option approval level 2 is an incremental improvement over the previous level. Once again, there is limitation on each of these different levels of option approval. Thus, each level is cumulative. At this level, short selling is possible, as well as many different types of ratio spreads. It is possible to fill out additional paperwork and to have the level of approval bumped up. At any rate, there is no official standard of what strategies could be traded at which level. This article originally appeared on The Options Insider Web site. At this level, a trader is permitted to perform both strategies listed in Level 1, as well as going long on calls and puts. If one is shorting a horizontal spread without sufficient funds in his or her account, the broker would automatically reject that order.
Now there is a catch to it; at this level a trader is not allow to buy any calls, but is allowed to buy puts only in the amounts he or she holds, and also only on the specific stock that he or she owns. Usually there are four option approval levels, generally ranked from one to four, the highest rank being the highest level of approval. For more information, please read the Characteristics and Risk of Standardized Options brochure before you begin trading.