How can I get approved for a higher options-trading level?

I only got approved for Level 1 or 2. I can’t trade spreads. What do I do?

First, be clear on what level you need. Different brokers use different level systems, so contact your broker directly to ask what level you need in order to trade the option strategies you want to trade. Note that you need to be authorized to trade  spreads in order to use our Options for Income and Velocity Trader services. 

When you applied for approval, did you answer the broker’s application questions “confidently yet without exaggeration”? Jim tells you how to put your best foot forward in this  video.

If you put your best foot forward and you received a too-low approval, you may need to increase your investor knowledge before risking your money.

Several of the trading platforms, including TD Ameritrade’s thinkorswim and TradeStation, allow you to do “paper trades” as a way to practice options trading using fake money. Paper trading is a great way to increase your trading experience (and confidence!) so that you can reapply for a higher trading level than you were initially granted. 

The more experience you have with paper trading, the higher level you’ll qualify for when using real money. Just place the trades using your paper-trade account and soon you’ll understand how the trades play out. Since most brokers allow you to reapply online as often as you like, see how soon you’ll be approved to trade using real money for real profits.

However, you should be aware that paper trading does not exactly mimic real trading. TD Ameritrade’s thinkorswim platform, for example, explains that their paperMoney version differs from their Live version in these ways:

  • There is no after-hours trading, so your paperMoney orders are filled only during U.S. trading hours. Also, orders such as MOD (market-on-open) and MOC (market-on-close) are not supported in paperMoney.
  • paperMoney orders are not technically filled. It’s not an exact science, but for stocks, paperMoney orders are generally filled at the LAST traded price. For paperMoney options, it is typically the mid-point between the bid and ask. Depending on the instrument you are trading, this method may range from extremely realistic to extremely unrealistic.
  • Options in paperMoney are never exercised early. This also means that you will never be subject to early assignment in paperMoney.
  • Dividends and other corporate actions are not applied in paperMoney.
  • As soon as the market opens, you may get filled at the MARK on paperMoney. Based on real market liquidity, getting fills with real money just after the market opens may not be nearly as easy.
  • Trade size is not a factor in paperMoney the way it is in real life. Therefore, if you are practicing with 10,000 contract orders in paperMoney, you are likely to experience far better fills than what you could expect in real life on orders of that size.
  • You are typically a more objective trader with paperMoney. Once real money is on the line, your emotions return to possibly alter your decision-making process.

Besides thinkorswim, several other brokers preferred by options traders for trading real money also allow paper trading, so you’d want to ask them directly how their paper-money process differs from using a live-money account. (At Investing Daily, we’re not affiliated with any broker and don’t recommend one over another.)

Usually you’ll have to open and fund a real account with a broker that offers paper trading, so you may want to  Compare Options Trading Brokers to see which will be the best fit for you long-term.

Here are the options brokers that we know of that offer paper trading:

Whether you get started using real funds or simulated funds, a glorious adventure awaits you. Happy trading!

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