How to Trade Options With Schwab - SmartReads by SmartAsset

If you would like to trade options, Schwab is a good choice.

Since acquiring TD Ameritrade, Schwab has integrated the popular Thinkorswim trading platform into their own online brokerage. Thinkorswim is particularly useful for complicated, highly technical trading, which is exactly what options traders need.

So, if you’re a Schwab customer, here’s what you should know about getting permission to trade options with your account.

Remember, options trading is risky and typically pursued by experienced investors. Need help approaching options strategies? Talk to a financial advisor today.

What Is Options Trading?

First, it’s important to understand the fundamentals of options trading. An options contract is a form of financial security called a “derivative.” That means it takes its value from some other underlying asset. With an option, you purchase a contract that gives you the right to buy that underlying asset (a “call” option) or sell it (a “put” option) for a given price on a given date if you choose. You then make – or lose – your money based on how that asset’s price moves.

For example, you might by a call option for 100 shares of ABC Corp. with a strike price of $100 per share and an expiration date of June 1. This means that:

The underlying asset is 100 shares of ABC Corp.
As a call option, you have the right to buy those shares
You have the right to buy those shares on June 1
You can buy the shares for $100 per share

Here, you are betting that the price of ABC Corp. will go up. If it does, and the stock is worth more than $100 per share on June 1, you can buy those shares for less than they’re worth and profit off the difference. A put option, by contrast, would bet that the value of those shares declines so that you can sell them for more than they’re worth.

Options are high-risk and values swing sharply compared to the regular stock market. Talk to a financial advisor about the right level of risk for your portfolio.

What to Do With Unprofitable Options

You do not have to exercise your option. If, on the expiration date, your contract is unprofitable you can simply let it expire with no further action. In our example above, say that on June 1 your shares are worth $90 each. You would lose money buying them for $100 per share, so you decline your option.

Buying an options contract costs money. This is known as the premium. In our example above, say the party selling you this contract priced it at $1.00 per share. It would cost you $100 to buy that contract.

Premiums are a fixed cost that you pay up front. For someone who buys an option contract, they make up a real but predetermined risk to this asset class. This is good because it means that your risks are known up front, you cannot lose more than you invested when you buy an options contract. However premiums can still cost a lot of money, and options should absolutely be considered a speculative investment.

How To Add Options To A Schwab Account

Adding options to your Schwab account is a simple process, but you’ll need to apply and get approved.

If you do not already have a brokerage account with Schwab, you will need one. You can sign up through Schwab’s website. Unlike some brokers, Schwab doesn’t require a minimum balance to open an account.

Once you have an account, you must specifically apply to add options trading.

Levels of Options Permissions

Schwab offers four levels of options trading. They are listed numerically, from 0 to 3, or by the level of trading each allows: “Covered,” “Long,” “Spreads,” and “Short Uncovered.” Each allows you to trade with an escalating level of risk and complexity. At level 0, you can only engage in relatively simple practices where losses are capped at the level of your initial investment. At level 3, you can engage in a wide variety of complicated and high-risk trades.

You will apply for options trading based on the level of permission you would like. For example, you might apply for a Level 1, “Long,” account if you would like to engage in modestly complex trades without high risk. Not all accounts are eligible for different types of options trading. For example, in an IRA you cannot open a position with borrowed money or potentially unlimited risk, so Schwab disables Level Three. If you apply for Level Three trading with an IRA account, it will be rejected.

A financial advisor can help you devise options strategies.

How to Apply

You can apply to add options in two ways. First, you can print out and mail in the application form in hard copy.

Alternatively, you can fill out the form online. In your account, you will find a drop-down menu labelled “Profile.” In there, you can select the choice for “Margin & Options.” If you have multiple accounts or portfolios, select the one to which you would like to add options trading.

Then, select the level of options trading you would like to apply for. Each one will be listed with a separate option to apply, although the system will black out any trading level that your account cannot access. For example, IRA portfolios will not have a link to apply for Level Three trading.

This will take you to an online form which will request the same information as the downloadable form. In both cases, you will be asked to provide personal and financial information, including your profession, income, and net worth and your spouse’s if applicable. You will also be asked about your background as a trader, such as how many years you have been investing and the complexity of your trading activity. Together, this will make up a basic profile that Schwab will use to determine whether you are experienced enough to make riskier investments, and if you have the capital to handle losses.

From there, it typically takes three to five business days for them to process an application.

Talk to a financial advisor about the right options strategies for your goals.

Bottom Line

With Schwab, you can trade options on four different levels based on your desired complexity and risk. You can apply either online or through a paper form, and once approved you can use the Thinkorswim platform for technical trading.

Options Trading Tips

Don’t understand how options work? Don’t worry! If you’re just getting started you shouldn’t add these assets to your portfolio just yet; never, ever trade an asset you don’t fully understand. Instead, let’s start learning about what an options contract is and how it can add value to your portfolio in the long run.
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