Prerequisites for Trading Options – Who can trade them?

Part 4 – Who should trade options? It isn’t for everyone but just about anyone can if they are serious.

Fidelity suggests, as do many brokers, that “anyone can trade options.” But anyone does not include everyone.

Anyone can trade options in their brokerage account, if approved. At Fidelity, this requires completing an options application that asks questions about your financial situation and investing experience and reading and signing an options agreement. It is also possible to trade some options strategies in other types of accounts, such as an IRA.” * – Fidelity Investments

Should You Trade Options?

Learn the basics now for benefit later.

Let me tell you why I trade options, and this might help you decide if you want to pause before you start trading options as a regular part of your investment plan. Bear in mind, however, that learning how to do it now, and trying some low-risk trades as a part of your investment education can prepare you for future investing opportunities. You might not ride a bicycle every day but knowing how to ride one is a good skill for the times when you want to ride one. So you start with a tricycle or with training wheels.

Three Reasons I trade Options are: Income, reducing the size of an investment and buying shares using cash covered puts options.

There are three reasons I trade options: 1) The primary reason is for additional income. Some of that income generation is from stocks that do not pay a dividend. But there are dividend-growth positions where options trades make sense as well. For example, if I have a heavy weighting in an investment, like Pfizer for example, I might sell covered call options (CCOs) on some of the shares. 2) Reduce the size of an investment and gain income in the process. So the second reason to trade CCOs is to get additional income and to eventually reduce the number of shares of PFE in our accounts. Why not sell the CCO to take some additional income from a position before I sell the shares?

3) The third reason is less obvious. It is possible to sell another type of option, called a cash covered put. If I want to buy an investment, but I want to pay less for it than the current market price, I can choose the price I am willing to pay, within reason, and then sell “insurance” to an investor who may be worried about the decline in the price of their own investment in that stock. That means I might not get the shares, but I receive some immediate income that I keep regardless of where the stock price goes.

Should You Trade Options? Perhaps Not if You…

Long-term investors can trade options but should be careful.

Buy and Hold Your Investments: I am a buy and hold investor for 90% of the investments we own. Trading options might cause me to sell an investment that I intended to hold. (However, I can always repurchase the shares, perhaps at a lower price or using a cash covered put.) Buy and hold investors with a long period of expected investment growth before retirement may not want to trade too many options. Options have a defined expiration date and are typically shorter-term positions. If you want to focus most or all of your investment funds for the long-term goal of retirement, and you don’t want to actively manage your investments, you might not want to do a lot of options trades.

Are Inexperienced: It is true that options and options trades are more complex investments than buying stocks and ETFs. If you own stocks, you have partial ownership of a company. When you have options, they grant the right (but not the obligation) to buy or sell the underlying stock. This is just one example of added layers of complexity.

Three Tiers of Options Trading at Fidelity

Options trading strategies involve varying degrees of risk and complexity. Not all strategies are suitable for all investors. There are 3 tiers of options trading at Fidelity, and approval requirements are more rigorous at subsequent tiers, given the additional risks associated with more complex strategies. Your financial situation, trading experience, and investment objectives are taken into consideration for approval.*” – Fidelity Investments

Tier One – Options Tier 1 includes: Buy-writes, Selling covered calls, Rolling covered calls, Buying calls/puts, Selling cash covered puts, and Long straddles/strangles.

Tier Two and Tier Three have some even more complex choices for options trading.

If you are a Fidelity client, are you authorized?

The easiest way to see if you are authorized to trade options or to start the process, is to go to “Account Features” when you are viewing “All Accounts.” Expand the “Brokerage & Trading” option and click on “Options.” This is what my screen looks like:

The Options Setup within “Account Features”

When you click on “Options” you will see a list of your accounts. As you can see, I have “Options Tier 1” for three of my accounts. Cindie also has options trading enabled on her accounts, and I do her trades for her within Fidelity’s Active Trader Pro software. On this page you can “Manage” the choices. Before you take the time to start the process of getting approved for options trading, you may want to read my next post.

Three of my Accounts are set up for Options Tier 1 Trading

Links for Learning

If you want to gain a better understanding, there are helpful resources on the Fidelity Investments website. Here is one place to get started: Fidelity Learning Center

Scriptural Reminders About Contentment and Satisfaction

Ecclesiastes 4:6 “Better is a handful of quietness than two hands full of toil and a striving after wind.” Solomon was right. Don’t chase after wealth only to discover it lacks any real power to satisfy. I believe trading options can make it possible to be more generous to those who have needs. So my attempts to increase our income are not so that we can increase our consumption. Consumption never satisfies apart from being satisfied in the Bread of Life.

John 6:35 “Jesus said to them, ‘I am the bread of life; whoever comes to me shall not hunger, and whoever believes in me shall never thirst.’”

All scripture passages are from the English Standard Version except as otherwise noted.

*Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. – Fidelity’s disclaimer appears frequently. Heed it if you aren’t willing to learn the skills needed to trade options.