Every broker assigns you an options trading level that determines which strategies you can use. The naming varies slightly between brokers, but the concepts are universal. Here's what each level means and what it unlocks.

Level 1: Covered Strategies

What you can do:

  • Sell covered calls (own stock + sell calls)
  • Buy protective puts (own stock + buy puts)

    • What you can't do:

  • Buy calls or puts without stock
  • Sell naked puts
  • Use spreads

    • Who it's for: Stock investors who want to generate income or protect existing positions.

    Risk profile: Low. Your obligations are always backed by stock you own.

    This is where everyone should start. Covered calls alone can add 8-15% annual return to a stock portfolio. Tools like OptionsPilot are specifically designed to optimize Level 1 strategies.

    Level 2: Long Options + Cash-Secured Puts

    What you can do (in addition to Level 1):

  • Buy calls (long calls)
  • Buy puts (long puts)
  • Sell cash-secured puts (cash backs the put obligation)

    • What you can't do:

  • Use spreads
  • Sell naked options

    • Who it's for: Traders who want directional exposure or want to sell puts with cash collateral.

    Risk profile: Moderate. Long options risk is limited to premium paid. Cash-secured puts require holding cash equal to potential assignment value.

    Level 2 opens the door to the wheel strategy: sell puts until assigned, then sell covered calls on the acquired stock.

    Level 3: Spreads

    What you can do (in addition to Levels 1-2):

  • Debit spreads (bull call, bear put)
  • Credit spreads (bull put, bear call)
  • Iron condors and iron butterflies
  • Calendar spreads and diagonal spreads
  • Straddles and strangles (long)

    • What you can't do:

  • Sell naked calls or puts
  • Sell uncovered straddles/strangles

    • Who it's for: Intermediate traders who want defined-risk strategies with more flexibility.

    Risk profile: Moderate to high. All strategies have defined maximum loss, but the strategies are more complex.

    Level 3 is where most active options traders operate. Spreads are capital-efficient, and defined risk means you always know your worst-case scenario.

    Level 4: Naked / Uncovered Options

    What you can do (in addition to all lower levels):

  • Sell naked puts (no cash securing them)
  • Sell naked calls (no stock covering them)
  • Sell uncovered straddles and strangles
  • Essentially any options strategy

    • What you can't do: Nothing is restricted at this level.

    Who it's for: Experienced traders with substantial accounts and deep understanding of risk.

    Risk profile: High. Naked calls have theoretically unlimited loss potential. Naked puts can force you to buy stock with money you don't have.

    Broker-Specific Level Mapping

    Brokers don't all use the same numbering system:

    | Strategy | Fidelity | Schwab | Robinhood | Tastytrade | Covered callsLevel 1Level 0Level 2Basic Long optionsLevel 2Level 1Level 2Basic SpreadsLevel 3Level 2Level 3Standard | Naked options | Level 4 | Level 3 | N/A | Advanced |

    Note: Robinhood doesn't offer naked options to retail traders.

    How to Upgrade Your Level

    Build a track record. Trade consistently at your current level for 3-6 months.

    Request the upgrade. Most brokers have an online form or you can call.

    Update your profile. If your income, net worth, or experience has changed, update your application.

    Demonstrate knowledge. Some brokers ask additional questions when you request upgrades.

    Which Level Do You Actually Need?

    For most individual investors:

  • Level 1 is sufficient for covered call income strategies
  • Level 2 adds cash-secured puts and the full wheel strategy
  • Level 3 is needed for spreads and more complex defined-risk trades
  • Level 4 is rarely needed and carries risks most traders don't need to take

    • Don't chase higher levels for ego. A disciplined Level 2 trader will outperform a reckless Level 4 trader every time. Focus on mastering the strategies available to you before seeking more.