How to Sell Covered Calls on Thinkorswim (TD Ameritrade): Approval Level, Setup, and First Trade

The Short Answer: Level 1 Is All You Need

To sell covered calls on Thinkorswim (now part of Charles Schwab after its 2020 acquisition of TD Ameritrade), you need Options Approval Level 1 — the lowest tier available. That single approval unlocks covered calls and cash-secured puts for accounts that hold the underlying shares. You do not need Level 2, Level 3, or margin to write covered calls on stock you already own.

If your account already has options trading enabled, check your current level inside Thinkorswim under Client Services → My Profile → Approvals. If you see Level 1 or higher, you are cleared to start. If options are not yet enabled, the next section walks you through the application.

What Are the Four Options Approval Levels on Thinkorswim?

Thinkorswim uses a four-tier approval system. FINRA Rule 2360 requires brokers to collect suitability information before granting options trading, which is why you fill out a short questionnaire during the application.

Level 1 — Covered calls and cash-secured puts. You own the shares or hold the cash. Risk is defined and capped.

Level 2 — Everything in Level 1, plus long calls, long puts, and long straddles. You are buying options, so your maximum loss is the premium paid.

Level 3 — Everything in Level 2, plus spreads (verticals, calendars, diagonals). Requires a margin account.

Level 4 — Everything in Level 3, plus naked (uncovered) short options. Requires substantial net worth and trading experience. The SEC and FINRA both flag naked short options as high-risk instruments unsuitable for most retail investors.

For a covered-call income strategy, Level 1 is the only tier you need. Requesting a higher level than necessary does not improve your results and can expose you to strategies that carry unlimited loss potential.

How to Apply for Options Approval on Thinkorswim

Step 1 — Log in to your Thinkorswim desktop platform or the TD Ameritrade/Schwab website.

Step 2 — Go to Client Services → My Profile → General → Elections & Routing. Click Apply next to Options Trading.

Step 3 — Complete the options application. You will answer questions about your annual income, net worth, investment experience, and trading objectives. Answer honestly. The platform uses this data to determine the highest level you qualify for, as required by FINRA suitability rules.

Step 4 — Select Level 1 as your requested tier if you only plan to write covered calls. The system may offer you a higher level based on your answers; you can accept or decline.

Step 5 — Approval is usually instant for Level 1 if your answers meet the minimum thresholds. Occasionally it takes one business day for manual review.

Canadian residents trading through TD Direct Investing (a separate entity from TD Ameritrade) follow a similar suitability process governed by IIROC rules and must hold the underlying shares in the same account to qualify for covered-call writing.

A Worked Example: Selling a Covered Call on AAPL

Let's say you own 100 shares of Apple (AAPL) purchased at $185 per share. The stock is currently trading at $192.50. You want to generate income without selling your shares.

You open the Thinkorswim platform and pull up the AAPL options chain. You click the Trade tab, then select Options Chain. You are looking at the expiration 21 days out — a standard monthly cycle.

You find the $197.50 strike call. The bid is $1.85 and the ask is $1.90. The delta on this strike is approximately 0.28, meaning the market assigns roughly a 28% probability that AAPL closes above $197.50 at expiration. You decide to sell one contract (which covers your 100 shares) at the bid of $1.85.

You right-click the bid price and select Sell → Single. A trade ticket appears. Confirm the order type is Limit at $1.85, the quantity is 1 contract, and the action is Sell to Open. Click Confirm and Send.

Your account is immediately credited $185 (1 contract × 100 shares × $1.85 premium). This cash is yours to keep regardless of what happens next.

Scenario A — AAPL closes at $194 on expiration day. The $197.50 call expires worthless. You keep the $185 premium and still own your 100 shares. Your effective cost basis drops from $185 to $183.15 per share.

Scenario B — AAPL closes at $200. The call is in the money. Your shares are called away at $197.50. You receive $19,750 for the shares plus the $185 premium already collected — a total of $19,935 on a position that cost you $18,500. That is a $1,435 gain in 21 days, capped at that level.

Scenario C — AAPL drops to $175. The call expires worthless and you keep the $185 premium, but your shares are now worth $17,500 — a paper loss of $1,000 net of premium. The covered call reduced your loss but did not eliminate it. This is the core risk of the strategy.

What Are the Real Risks of Selling Covered Calls?

Covered calls are often marketed as low-risk, but that framing is incomplete. Here are the three risks every seller must understand before placing a trade.

Capped upside. Once you sell a call, your profit on the shares is capped at the strike price. If AAPL rockets from $192.50 to $220 before expiration, you still sell at $197.50. You miss $22.50 per share of gains. The Options Industry Council (OIC) describes this as the primary trade-off of the covered-call strategy.

Full downside on the stock. The premium you collect is a small cushion, not a hedge. If the stock falls 20%, a $1.85 premium does not come close to covering that loss. You bear the full downside of stock ownership.

Early assignment risk. American-style options (which cover most US-listed stocks) can be exercised at any time before expiration, not just on the last day. If your call goes deep in the money and the buyer exercises early — most commonly just before an ex-dividend date — your shares are called away sooner than expected. FINRA notes that early assignment is one of the most common surprises for new options sellers.

Tax treatment. In the US, the IRS treats covered-call premiums as short-term capital gains in most cases, regardless of how long you have held the underlying stock. Writing a call can also affect the holding period of your shares and potentially convert a long-term gain into a short-term one if the call is considered a qualified covered call under IRS Section 1092. Consult a tax professional before writing calls on shares you have held for close to one year. Canadian investors should note that the CRA has its own rules on option premiums and adjusted cost base.

Tips for Managing Your First Covered Call Trade on Thinkorswim

Set a buy-to-close order immediately. After selling the call, place a limit buy-to-close order at 50% of the premium you received. On the AAPL example above, that means a buy order at $0.93. If the call decays to that level quickly — often within the first week or two — you close the trade early, lock in half the profit, and free up the shares to sell another call. This is sometimes called the 50% rule and is widely used by systematic covered-call writers.

Use the Analyze tab. Thinkorswim's Analyze tab shows you a profit/loss curve for your position at expiration. Before you confirm any trade, switch to Analyze and drag the price slider to see exactly what you make or lose at different stock prices. This takes 30 seconds and removes guesswork.

Stick to liquid names. AAPL, MSFT, NVDA, and SPY all have tight bid-ask spreads and high open interest. Illiquid options have wide spreads that eat into your premium. The OIC recommends checking open interest and volume before entering any options trade.

Avoid earnings weeks for your first few trades. Implied volatility spikes before earnings, which inflates premiums — but the stock can move violently in either direction after the report. Until you are comfortable managing the position, sell calls in weeks with no scheduled earnings announcements.

Keep position size reasonable. A common guideline from FINRA's investor education materials is to avoid concentrating more than 5-10% of your portfolio in any single options strategy until you have direct experience with how the position behaves.

What options approval level do I need to sell covered calls on Thinkorswim?

You need Level 1, the lowest options approval tier on Thinkorswim. Level 1 covers covered calls and cash-secured puts, which are the two strategies where your risk is fully defined by assets you already hold. You do not need margin or a higher approval level.

Does TD Ameritrade still exist, or is it now Schwab?

Charles Schwab completed its acquisition of TD Ameritrade in 2020, and the Thinkorswim platform was fully migrated to Schwab by 2023. The platform is still called Thinkorswim and works essentially the same way. You log in through Schwab's website or the Thinkorswim desktop app.

How many shares do I need to sell one covered call?

You need at least 100 shares of the underlying stock to sell one standard covered call contract, because each US equity options contract represents 100 shares. If you own 250 shares, you can sell two contracts and still have 50 shares uncovered.

Can I sell covered calls in an IRA on Thinkorswim?

Yes. Thinkorswim allows covered-call writing in traditional and Roth IRA accounts at Level 1. Because IRAs are cash accounts with no margin, you cannot sell naked options, but covered calls are fully permitted. The IRS does not treat options premiums earned inside an IRA as taxable income until you take a distribution.

What happens if my covered call gets assigned early?

Early assignment means the option buyer exercised their right to buy your shares before expiration. Your 100 shares are sold at the strike price, and you keep the premium already collected. To avoid early assignment surprises, watch for ex-dividend dates — buyers sometimes exercise calls early to capture the dividend.

How do I close a covered call before expiration on Thinkorswim?

Go to the Monitor tab, find your open short call position, right-click it, and select Buy to Close. Enter a limit price — typically 50% of the original premium if you want to follow the 50% profit-target rule — and submit the order. Once filled, your obligation is cancelled and your shares are free again.