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Opening an options trading account
Before you can even get started you have to clear a few hurdles. Because of the amount of capital required and the complexity of predicting multiple moving parts, brokers need to know a bit more about a potential investor before awarding them a permission slip to start trading options.
Brokerage firms screen potential options traders to assess their trading experience, their understanding of the risks in options and their financial preparedness.
You’ll need to provide a prospective broker:
- Investment objectives such as income, growth, capital preservation or speculation
- Trading experience, including your knowledge of investing, how long you’ve been trading stocks or options, how many trades you make per year and the size of your trades
- Personal financial information, including liquid net worth (or investments easily sold for cash), annual income, total net worth and employment information
- The types of options you want to trade
Based on your answers, the broker assigns you an initial trading level (typically 1 to 4, though a fifth level is becoming more common) that is your key to placing certain types of options trades.
Screening should go both ways. The broker you choose to trade options with is your most important investing partner. Finding the broker that offers the tools, research, guidance and support you need is especially important for investors who are new to options trading.
» Compare costs, minimums and other features: Our picks of the best brokers for options trading
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