How to Get Approved for Covered Calls on E*TRADE: Options Level Requirements Explained

The Short Answer: You Need Options Level 1 on E*TRADE

To sell covered calls on E*TRADE, you need Options Level 1 approval — the entry-level tier. That is it. You do not need Level 2, Level 3, or a margin account. Because you already own the underlying shares, E*TRADE treats covered calls as a low-risk strategy, and Level 1 is designed exactly for this purpose.

If you already have a brokerage account at E*TRADE (now part of Morgan Stanley), you can apply for options approval directly inside the platform. Most retail investors with a basic investing history get approved within one business day, sometimes instantly.

What Are E*TRADE's Options Approval Levels?

E*TRADE uses a tiered system to match options strategies to investor experience. Here is how the levels break down:

**Level 1** — Covered calls and cash-secured puts. You own the stock (or hold the cash). Risk is defined and limited.

**Level 2** — Long calls and long puts. You are buying options outright, which means you can lose the entire premium paid.

**Level 3** — Spreads (vertical, calendar, diagonal). Requires understanding of multi-leg strategies.

**Level 4** — Naked puts and more complex strategies. Requires margin.

**Level 5** — Naked calls and the highest-risk strategies. Rarely approved for retail accounts.

For covered-call sellers, Level 1 is your target. The Options Industry Council (OIC) notes that covered calls are one of the most conservative options strategies available because the short call is fully collateralized by shares you already hold.

How to Apply for Options Approval on E*TRADE Step by Step

The application takes about 10 minutes. Here is the exact path:

1. **Log in** to your E*TRADE account at etrade.com. 2. Go to **Accounts → Account Settings** (or use the top navigation to find 'Options' under the trading menu). 3. Click **'Apply for Options Trading'**. 4. Fill out the options application. You will answer questions about your investment experience, annual income, net worth, liquid net worth, and investment objectives. 5. Select **Level 1** as your desired approval level if prompted, or simply answer the questionnaire honestly — E*TRADE's system will assign the appropriate level. 6. Review and submit. E*TRADE may approve you instantly or send a follow-up request for more information.

FINRA Rule 2360 requires broker-dealers to collect this suitability information before approving options trading. E*TRADE is complying with that rule when it asks about your finances and experience — it is not being nosy.

**What if you get denied or receive a lower level than requested?** Call E*TRADE's options desk directly. Explain your experience selling covered calls, your portfolio size, and your understanding of the strategy. A brief conversation often resolves a denial, especially if your questionnaire answers were conservative.

What E*TRADE Looks for When Reviewing Your Application

E*TRADE's system scores your application on several factors. Being honest and specific helps:

**Investment experience:** If you have traded stocks for 3 or more years, say so. If you have sold covered calls at another broker, mention it in any free-text fields.

**Annual income and net worth:** Higher numbers improve your odds, but there is no published minimum for Level 1. Even investors with modest incomes routinely get Level 1 approval.

**Investment objective:** Choose 'Growth' or 'Growth and Income' rather than 'Capital Preservation' or 'Speculation.' Covered calls fit a growth-and-income profile.

**Account type:** Standard taxable brokerage accounts and traditional IRAs can both receive Level 1 approval. Roth IRAs can also be approved for covered calls at E*TRADE, which is a significant advantage since premiums collected inside a Roth grow tax-free. The IRS allows options trading inside IRAs as long as the account is not using prohibited transactions — covered calls on stock you already hold inside the IRA qualify.

Note for Canadian residents: If you hold a US brokerage account, the CRA treats covered-call premiums as income or capital gains depending on your trading frequency and intent. Consult a tax professional familiar with CRA guidance on derivatives.

A Worked Example: Selling a Covered Call on AAPL Through E*TRADE

Let's say you own 100 shares of Apple (AAPL), currently trading at $213 per share. You want to generate income without selling your shares.

**Your trade setup:** - Underlying: AAPL at $213.00 - Strike price: $220 call - Expiration: 30 days out - Premium collected: $2.85 per share ($285 total for one contract covering 100 shares) - Breakeven on the downside: $213.00 − $2.85 = $210.15

**What happens at expiration:**

*Scenario A — AAPL closes below $220:* The call expires worthless. You keep the $285 premium and still own your 100 shares. Annualized yield on this single trade: roughly 16% ($285 ÷ $21,300 × 12 months).

*Scenario B — AAPL closes above $220:* Your shares get called away at $220. You receive $22,000 for the shares plus the $285 premium, for a total of $22,285. You no longer own AAPL. Your gain is capped at $220, even if AAPL ran to $235.

On E*TRADE's platform, you would enter this as a 'Sell to Open' order on the AAPL $220 call. The platform will verify you hold 100 shares before routing the order, which is the collateral check that makes this a covered call rather than a naked call.

**Commission note:** E*TRADE charges $0.65 per contract for options trades as of this writing. On a single-contract covered call, that is $0.65 out of your $285 premium — a minor cost.

Real Risks You Should Understand Before You Start

Covered calls are conservative relative to other options strategies, but they carry real risks. Do not skip this section.

**Capped upside:** If AAPL jumps from $213 to $240 before expiration, you miss $20 per share of that gain. You sold that upside when you sold the call. This is the single biggest complaint from covered-call sellers who hold high-growth stocks.

**You still own the stock:** The premium you collect does not protect you from a large drop. If AAPL falls from $213 to $170, you lose $43 per share minus the $2.85 premium. The covered call reduced your loss slightly but did not prevent it. The SEC's investor education materials remind retail investors that options do not eliminate equity risk.

**Early assignment:** American-style options (which AAPL options are) can be exercised before expiration. This is rare but happens most often just before an ex-dividend date. If your shares get called away early, you miss the dividend.

**Tax treatment:** In a taxable account, premiums collected from selling covered calls are generally treated as short-term capital gains, regardless of how long you have held the stock. However, if the call is 'in the money' when you sell it, IRS rules under Section 1092 (the straddle rules) may suspend the holding period on your shares. This can affect whether your stock gains qualify for long-term capital gains rates. Consult a tax advisor or review IRS Publication 550 before trading covered calls on shares you plan to hold long-term for tax purposes.

Tips to Maximize Your Approval Odds and Start Trading Faster

A few practical moves that help:

**Fund your account first.** An account with $10,000 or more in assets signals that you are a serious investor. Applications on unfunded or minimally funded accounts sometimes get flagged for manual review.

**Be specific about experience.** If the application asks how many years you have traded options, do not round down. If you sold covered calls at Fidelity or TD Ameritrade for two years, that counts.

**Apply for Level 1 only.** Applying for Level 3 or Level 4 when you only want to sell covered calls can trigger additional scrutiny and slow down approval. Match your request to your actual strategy.

**Check your account type.** If you want to sell covered calls inside an IRA at E*TRADE, make sure you apply for options approval specifically on that IRA account. Options approval does not automatically transfer between account types.

**Keep records.** Once approved, document your trades. The OIC recommends that all options traders maintain a trade log showing entry price, strike, expiration, premium received, and outcome. This is especially useful at tax time when you need to reconcile premiums with your 1099-B from E*TRADE.

What options level do I need for covered calls on E*TRADE?

You need Options Level 1, which is the lowest tier E*TRADE offers. Level 1 covers covered calls and cash-secured puts because both strategies are fully collateralized. You do not need a margin account or a higher approval level to sell covered calls.

How long does E*TRADE options approval take?

Many applications are approved instantly or within one business day. If E*TRADE needs more information, they may contact you by email or phone, which can add one to three business days. Having a funded account with some trading history speeds up the process.

Can I sell covered calls in an E*TRADE IRA?

Yes. E*TRADE allows Level 1 options trading inside traditional IRAs and Roth IRAs. You must apply for options approval on the IRA account specifically, separate from any taxable account approval. Premiums collected inside a Roth IRA grow tax-free under current IRS rules.

What happens if E*TRADE denies my options application?

Call E*TRADE's options trading support line and ask for a manual review. Explain your experience with covered calls, your portfolio size, and why the strategy fits your goals. Many denials are reversed after a short conversation with a representative.

Do I need 100 shares to sell a covered call on E*TRADE?

Yes. One standard options contract covers 100 shares of the underlying stock. You must own at least 100 shares before E*TRADE will let you sell one covered call contract. If you own 200 shares, you can sell up to two contracts.

Are covered call premiums taxed as ordinary income or capital gains?

In a taxable account, premiums from selling covered calls are generally treated as short-term capital gains when the option expires or is closed. However, IRS straddle rules under Section 1092 can affect the holding period of your underlying shares if the call is in the money at the time you sell it. Review IRS Publication 550 or consult a tax professional before trading.