Options and options trading has become among the hottest new trends in personal finance. The ease of access permitted by the internet and the myriad trading platforms like Scottrade, OptionsXpress and E*Trade have combined to make the practice easier than ever. One of the first questions raised by new traders is whether you have to get a margin account, with a view to trade options. The easy answer is no; you don’t have to get a margin account, with a view to trade options. The more complicated answer is maybe; You might have to get a margin account, with a view to trade options. In order to fully understand the difference you must first know what a margin account is.
When you find yourself day trading, swing trading, forex trading, or scalp trading, it is a good idea that you open a margin account. Trading with margin boosts the magnitude of risk and it will require you to get a specific amount of money in your account continuously yet it will also supply you with more buying power. There are various margin requirements for each stock traded so consult with your broker to be aware what those conditions are.
The difference between a margin account and an equity account is a margin account enables you to buy or trade securities equal to a much greater amount than the cash balance available. By definition margin is the amount of collateral or equity that an account holder has to deposit in order to meet the trade risks associated with the account. In more general terms margin is the amount of money you must bear in your margin account to buy and sell securities. Effectively, a margin account, it’s like a line of credit extended by your broker. The amount of credit you receive is directly related to how much cash is deposited in the account.
Options trading margin requirements
After your account is funded your broker will extend a line of credit according to your account balance. Most margin accounts have a minimum balance that needs to be maintained. At the conclusion of each trading day the cash balance and margin requirements of the account are calculated on the basis of days activity. After that the next days credit limit is set. If you go over the account limit for a single day or the cash worth of the account falls below the account minimum then a margin callis made and you’ll have to deposit more cash to cover the margin requirements.
FAQ’s: What are the requirements to trade options?I have an Ameritrade account and attempted to review an options purchase but I was denied because it said my account is not approved for options trading. How do i get approved? I have less than $25000. If i open a margin account will I be able to trade options? If i open a margin account is there any fees if I never trade on margin? Thanks! I understand the risk in investing
As you found out you can not just trade in options with any brokerage firm. You must sign or accept an option agreement and be approved by the firm to trade in options. You have to call customer service and have them work through your option agreement, then they can approve you for option trading. You DO NOT need a margin agreement (or a margin account) to trade in options, only if you are writing uncovered, nor do you need $25,000 An NO they like mostly all brokerage firms DO NOT check you credit report. Talk to customer service, they will send you a pamphlet on risk of option trading.
Side note: They checked my credit reports. I remember the inquiry on my reports and was shocked. Do you have established credit with little or no debt? Also, they can look into your other accounts. There is a database called ChexSystems and they can see other accounts.
<<<I have an Ameritrade account and attempted to review an options purchase but I was denied because it said my account is not approved for options trading. How do i get approved?>>> Most brokerages have multiple authorization levels for trading options. The lowest level usually only allows you to open and close covered calls and/or long option positions. At Ameritrade you need a minimum account size of $2,000. https://www.tdameritrade.com/account-types/standard.page Unless there has been some change, you will also need to certify that you have read "Characteristics & Risks of Standardized Options" which you can find at http://www.optionsclearing.com/about/publications/character-risks.jsp To do other types of options trades you need meet higher requirements to demonstrate (1) you understand what you are doing and (2) you hae the financial ability to takes the risks involved. The only way to get your option trading level raised is to ask your brokerage to raise it. <<<I have less than $25000. If i open a margin account will I be able to trade options?>>> Some types of option trades can be made without a margin account, including opening and closing long option position writing and closing covered calls writing cash secured put options. Other types of option trades require a margin account. <<<If i open a margin account is there any fees if I never trade on margin?>>> No. <<<I understand the risk in investing>>> I am not sure I have ever known of a person who understood all the risks associated with options when first trading them. You are less likely to get in trouble if you assume you do not know all the risks. —– Brokerages are required to keep customers from taking risks that are inappropriate. Determining if an investment is appropriate is done differently at different brokerages. You need to talk to your brokerage to find out what they consider in determining your option trading level and what kind of trades are permitted at each level..