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Tap the magnifying glass in the top right corner of your home page. Option approval level 4 is known as uncovered selling or naked shorting. This article originally appeared on The Options Insider Web site. Close Menu. Log in. Log out. About Us Our Analysts. Sponsored by. Level 2 Option approval level 2 is an incremental improvement over the previous level.

Level 3 Option approval level 3 involves spreads regardless of whether they are diagonal , horizontal or vertical. Level 4 Option approval level 4 is known as uncovered selling or naked shorting. At this level, short selling is possible, as well as many different types of ratio spreads.

A breakdown of option approval levels one through four

Sponsored Headlines. More from InvestorPlace. By Sarah Smith Mar 29, Long calls and puts mean straight forward buying calls and puts. A long straddle involves buying a call and a put option with the same expiration date and same strike price in the same stock.

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The goal of a straddle is to bet on a big move in the stock and profit whether the stock goes up or down. A long strangle differs from a long straddle in that the call and the put have different strike prices. Level 2: Spread trading. The strategies here including everything in Levels 0 and 1 plus different types of spreads.

The three main classes of spreads are vertical, horizontal, and diagonal spreads. A vertical spread has options with the same expiration but different strike prices.

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A horizontal spread has options with the same strike price but different expiration dates. A diagonal spread has options with both a different strike price and a different expiration date. Within each class, there are many different strategies.

Level 3: Naked options. This includes all previous levels plus all types of uncovered option shorting. This means selling calls or puts without having either the underlying stock or sufficient cash to cover the purchase of the stock in case the options are exercised. However, spread trading is allowed, if no margin is used.