Jim Woods

Opening Your Options Trading Account

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If you're reading this, you are probably convinced that options can be a great asset in the battle for investment returns. But before you can trade options, you are going to have to open an options trading account.

Opening this account can be a bit different than what you may be used to, particularly if you're new to the options game.

One of the first things you will be asked when opening an options account is if you want that account to be a "cash" or a "margin" account.

Why You Need a Margin Account

As you might know, a margin account allows you to borrow the broker's money to buy certain securities. More specifically, with a margin account, you only are allowed to borrow money against "marginable securities," which includes most stocks, bonds and mutual funds.

However, options themselves are NOT marginable securities. You cannot buy options on margin.

Options are "cash only" trades. And since they settle in one business day (or same day), you must have enough cash in your account to cover the amount of your option trade. Some advanced option trades, like "selling puts," require you that you have some funds set aside in your account, just in case you are called on to perform your obligation of buying a certain amount of shares, at a certain price, by a certain date.

When opening an account, it's always a good idea to set up a margin-- account -- even if you don't plan to use it. The fact is, if you want to be able to do more advanced kinds of option trading, you must be approved for a margin account-- which is as easy as checking a box.

Options Approval and Options Levels

Once you establish your option account, you are immediately granted approval to make the following options transactions:

• Sell covered calls (or buy writes)
• Buy call options
• Buy put options

The covered call is one of the most conservative and least risky option strategies out there. Before you sell the calls, you have to own the stock (meaning you're covered), in the event the stock gets called away from you. It's simple, and there's virtually no risk to the brokerage firm.