What Options Approval Level Do You Need on Robinhood to Sell Covered Calls?

The Short Answer: You Need Level 1 on Robinhood

To sell covered calls on Robinhood, you need Options Level 1 approval. That is the entry-level tier, and it is specifically designed for covered calls and cash-secured puts — the two lowest-risk options strategies for stock owners. You do not need Level 2, Level 3, or a margin account to run a basic covered-call strategy on shares you already own.

Robinhood uses a two-tier system. Level 1 covers selling options against positions you already hold (covered calls) or cash you already have set aside (cash-secured puts). Level 2 opens up buying calls and puts, spreads, and more complex strategies. Most retail covered-call traders never need to go beyond Level 1.

How Does Robinhood Decide If You Qualify?

When you apply for options trading on Robinhood, the app asks you a short questionnaire. It covers your investing experience, your annual income, your net worth, and your stated investment goals. Robinhood uses those answers to assign you a level. FINRA Rule 2360 requires broker-dealers to perform a suitability review before approving customers for options trading, and Robinhood's questionnaire is how they meet that requirement.

For Level 1, Robinhood is generally looking for at least some investing experience and a basic understanding of how options work. You do not need to be a professional trader. If you have owned stocks for a year or two and can explain what a call option is, you are likely to qualify. If Robinhood declines your first application, you can update your profile to reflect more accurate experience or income information and reapply. The Options Industry Council (OIC) offers free education at its website that can help you build the knowledge base Robinhood is testing for.

What Exactly Is a Covered Call? A Quick Refresher

A covered call means you own at least 100 shares of a stock and you sell someone else the right to buy those shares at a set price (the strike price) before a set date (the expiration). In exchange, you collect a premium upfront. The call is 'covered' because you already own the shares — you are not naked short a call, which would be a far riskier trade requiring higher approval levels.

Here is a concrete example. Suppose you own 100 shares of Apple (AAPL) and the stock is trading at $213. You sell one AAPL $220 call expiring in 30 days and collect $2.10 per share, or $210 total (one contract covers 100 shares). That $210 is yours to keep no matter what happens. If AAPL stays below $220 at expiration, the option expires worthless and you keep your shares plus the $210. If AAPL closes above $220, your shares get called away at $220 — you still keep the $210 premium on top of the $220 sale price, but you no longer own the shares. That is the core trade-off every covered-call seller lives with.

What Are the Real Risks You Need to Know Before You Apply?

Covered calls are often described as conservative, and compared to buying speculative options they are. But they carry real risks that Robinhood's approval process does not fully protect you from.

Capped upside. The biggest cost of selling a covered call is that you give up gains above the strike price. In the AAPL example above, if the stock jumps to $240, you still sell at $220. You made money, but you left $20 per share on the table. Over time, repeatedly capping your upside on a strong stock can meaningfully reduce your total return.

You still own the stock. If AAPL drops from $213 to $170, you lose $43 per share on the stock. The $2.10 premium you collected barely dents that loss. A covered call does not protect you from a large drop in the underlying stock. It only softens the blow slightly.

Early assignment. American-style options — which is what most single-stock options on Robinhood are — can be exercised by the buyer at any time before expiration. If your call goes deep in the money, you could have your shares called away before the expiration date you planned for. The SEC's investor education materials note that early assignment is a risk sellers of American-style options must understand.

Tax consequences. When your shares get called away, that is a taxable sale. The IRS treats the premium you collected as part of your proceeds. If you have held the shares less than a year, the gain is short-term and taxed as ordinary income. Canadian investors should note that the CRA has its own rules on how options premiums are treated — generally as capital gains or income depending on your trading frequency and intent. Consult a tax professional before you start.

Step-by-Step: How to Apply for Level 1 on Robinhood

The process takes about five minutes inside the app.

1. Open the Robinhood app and tap the Account icon in the bottom right corner. 2. Go to Investing, then scroll to Options Trading. 3. Tap 'Enable Options' and work through the questionnaire. Answer honestly — Robinhood is trying to match you to the right level, not trick you. 4. Review the options agreement. This document explains the risks of options trading. Read it. FINRA requires that you receive and acknowledge this disclosure before trading. 5. Submit. Robinhood typically responds within one business day, often within minutes.

Once approved at Level 1, you can immediately start selling covered calls on any stock where you hold at least 100 shares. You will see a 'Sell Call' option when you navigate to the options chain for that ticker.

A Second Worked Example: Selling a Covered Call on MSFT

Let's walk through a second example using Microsoft (MSFT) to make the mechanics concrete.

Assume you own 100 shares of MSFT at a current price of $425. You want to generate some income without selling your shares. You look at the options chain and find a $435 call expiring in 21 days trading at $3.50 per share, or $350 for one contract.

You sell one MSFT $435 call and collect $350 immediately. Your three possible outcomes at expiration:

Outcome A — MSFT closes below $435. The option expires worthless. You keep your 100 shares and the $350 premium. Annualized, that is roughly a 14% income yield on the position if you can repeat a similar trade each month (though premiums vary and this is not guaranteed).

Outcome B — MSFT closes above $435. Your shares are called away at $435. You receive $43,500 for the shares plus you already have the $350 premium. Your effective sale price is $438.50 per share. You no longer own MSFT.

Outcome C — MSFT drops sharply, say to $390. The option expires worthless (good), but you are sitting on a $35 per share unrealized loss on the stock. The $350 premium reduces your cost basis slightly but does not come close to covering the drop.

This is the honest math of covered calls. They generate income in flat or slowly rising markets. They underperform in fast-rising markets. They do not protect you in falling markets.

Common Mistakes New Covered-Call Sellers Make on Robinhood

Selling calls on stocks you would not mind selling. This sounds like advice, but it is actually a risk warning. If you sell a covered call on a stock you desperately want to keep long-term, and it gets called away in a sudden rally, you may feel pressure to buy back in at a higher price — turning a small win into a net loss after commissions and taxes.

Chasing high premiums without understanding why they are high. A stock with a very high implied volatility (IV) pays bigger premiums, but it also moves more violently. High IV often signals uncertainty or an upcoming earnings announcement. Selling a covered call right before an earnings report can result in a large gap move that either blows past your strike (capping your upside dramatically) or crashes the stock (leaving you with a big loss the premium barely covers).

Forgetting about the bid-ask spread. On Robinhood, you can place limit orders on options. Always try to sell at or near the midpoint of the bid-ask spread rather than hitting the bid. On a liquid name like AAPL or MSFT, the spread is tight. On a thinly traded stock, you can give up a significant portion of your premium just by accepting the bid price.

Not tracking your cost basis. Every time you sell a covered call and collect premium, the IRS expects you to track that income. Keep records. Robinhood provides a 1099 at year-end, but it is your responsibility to verify the figures are correct.

Do I need a margin account to sell covered calls on Robinhood?

No. Covered calls are a cash account strategy because you already own the underlying shares. Robinhood does not require a margin account or Robinhood Gold subscription to sell covered calls at Level 1. Margin is only needed for strategies that involve borrowing, like naked calls or certain spreads.

What happens if Robinhood denies my options application?

Robinhood will tell you why your application was declined, usually because your stated experience or financial profile did not meet the threshold. You can update your profile with more accurate information — such as correcting your years of investing experience or income — and reapply. The OIC offers free courses that can help you build the knowledge base Robinhood is looking for.

Can I sell covered calls on ETFs like SPY on Robinhood?

Yes. As long as you own at least 100 shares of an ETF, you can sell covered calls against it at Level 1. SPY, QQQ, and IWM are among the most liquid options markets in the world, with very tight bid-ask spreads, which makes them popular choices for covered-call sellers.

What is the difference between Level 1 and Level 2 options on Robinhood?

Level 1 allows you to sell covered calls and cash-secured puts — strategies where you already own the asset or have the cash set aside. Level 2 adds the ability to buy calls and puts, and trade multi-leg spreads. Most retail covered-call income traders only need Level 1 and never upgrade.

How are covered call premiums taxed in the US?

The IRS generally treats premiums from selling covered calls as short-term capital gains in the year the option expires, is closed, or results in assignment. If your shares get called away, the premium is added to your sale proceeds and the holding period of the shares determines whether the gain is short-term or long-term. Always consult a tax professional for your specific situation.

Can I sell covered calls on Robinhood if I only own 50 shares?

No. One standard options contract covers exactly 100 shares, so you need at least 100 shares of the underlying stock to sell one covered call. If you own 150 shares, you can sell one covered call and still have 50 shares uncovered. You cannot sell a fractional contract.