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  • Writer's pictureScott Richter

What do levels 1, 2, 3, and 4 mean?

If you’re an experienced trader, then you probably already know everything in this blog post. But if you’re brand new to my YouTube channel, and options trading in general, then you’ll definitely want to give this a read. In options trading, there are four different ‘levels’ that a brokerage firm can qualify you for. Before you start to trade, know the level that’s best for you. And, of course, before you can know what level is best for you, it’s important to know what each level means, and the differences between each of the four.

When you’re first starting out, level 1 is where you’ll begin. Everyone automatically has level 1 access, by default, but this will only allow you do to covered calls, long protective puts, and long stocks – not a whole lot else. Not by coincidence, this is also the level of trading with the least amount of risk. At this level, you can only buy puts in the amount that you actually hold; you can’t buy any calls.

Level 2 is just a small, incremental change above the first level. At 2, you can do everything that you can already do with 1, but you can also go long on calls and puts. In fact, you can do an outright purchase of a call or put on optionable stocks, exchanged-traded funds, and indices. Brokers aren’t going to award this level of trading unless you have a proven track record and more money to spend.

At level 3, this is when things get very interesting, and it’s the main level you should be striving for to get the most ROI: Basically, this means that the brokerage firm is entrusting you to have a higher level of confidence and knowledge to be able to trade more stocks. This is the level that allows you to do different kinds of contracts, spreads, and naked puts. (And by ‘naked,’ what I mean is that you don’t own the underlying stock. So, when I sell a put to open, if one of these stocks tanks and goes all the way to zero, then the brokerage firm is taking a huge risk, because they don’t have a 50% margin requirement like they normally would on a stock.) At this level, they’re giving you more leverage with your trading of options and contracts, and if you know what you’re doing, then that’s definitely a good thing.

Level 4 isn’t really all that important – it’s just another small, incremental change above the third level. This is where you can do uncovered selling or naked shorting, and pretty much any kind of trade you can think of, but it’s reserved for the ultimate high rollers.

In short, in case you couldn’t tell, level 3 is really what you want to strive for. At level 3, you’ll be able to do the vast majority of trades that you see me doing on my YouTube channel, and, if you want to, you’ll be able to do those trades exactly when I do them, if you join my Patreon page, where you can see all of my trades in actual real time. So, until next time, Money Makers, I hope you continue to make that money, and let’s have some fun doing it!

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