Brokerage Setup for Covered Calls: The No-BS Guide to Getting Started

How to turn your brokerage account into an income-generating machine

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You understand covered calls. You’re ready to start collecting monthly rent checks from your stocks. There’s just one small problem: your broker treats options like they’re nuclear weapons, and getting permission to trade them feels like applying for top-secret clearance.

Here’s the reality: most brokerages make covered call approval unnecessarily complicated because they’d rather you sit in their managed funds paying 1% annually than generate your own 15-25% returns with covered calls. But once you know the system, getting approved is straightforward.

This guide will walk you through exactly how to set up any major brokerage account for covered call trading, what to say (and what not to say) on the applications, and how to avoid the common mistakes that get people stuck in approval hell.

Table of Contents

• Covered Call Account Requirements (The Basics)
• Understanding Options Permission Levels
• Step-by-Step Account Setup Process
• Platform-Specific Setup Guidelines
• The Options Application: What to Say (And What Not to Say)
• Common Approval Mistakes (And How to Fix Them)
• Getting Started: Your First Trade Setup
• Troubleshooting Common Issues

Covered Call Account Requirements (The Basics)

Let’s start with what you actually need to write covered calls. Spoiler alert: it’s not as complicated as the brokers want you to think.

The Non-Negotiable Requirements

1. A Brokerage Account Any legitimate brokerage will work - Schwab, Fidelity, E*TRADE, Interactive Brokers, Robinhood, etc. We don’t recommend specific brokers because they all have different strengths, and what matters most is that you’re comfortable with their platform.

2. Options Trading Permission This is the hurdle most people stumble over. You need what’s typically called “Level 1” or “Level 2” options approval. More on this below.

3. Sufficient Account Value Most brokers want to see at least $2,000-10,000 in your account before approving options trading. This isn’t a legal requirement, it’s their internal risk management.

4. Stock to Write Calls Against You need 100 shares of stock per covered call contract. No partial contracts allowed - options control 100-share blocks.

What You DON’T Need

❌ You don’t need:

• A margin account (cash accounts work fine for covered calls)
• Massive net worth (despite what the applications suggest)
• Years of trading experience (though you should learn the basics first)
• A finance degree or CFA certification
• Permission to trade naked options or complex spreads

Retirement Account Considerations

IRA and 401k Accounts: Most brokers allow covered calls in retirement accounts, but with restrictions:

• Must be cash-secured (no margin)
• Some brokers require higher approval levels
• Rolling strategies may be limited
• Assignment creates potential cash flow issues

Roth IRA Advantages:

• All covered call income is tax-free
• No required minimum distributions affect your strategy
• Perfect for long-term income strategies

Understanding Options Permission Levels

Every broker has their own numbering system, but the basic structure is similar across platforms. Here’s what you need to know:

Standard Options Approval Levels

Level 0: No Options (Default)

• Can’t trade any options
• This is where most accounts start

Level 1: Covered Calls and Cash-Secured Puts

• Sell calls against stock you own
• Sell puts with cash to buy the stock
• This is what you want for basic covered call strategies

Level 2: Long Options

• Buy calls and puts (speculation)
• Covered calls and cash-secured puts
• Still appropriate for most covered call strategies

Level 3: Spreads and Combinations

• Iron condors, butterflies, straddles
• More complex strategies
• Usually unnecessary for covered calls

Level 4: Naked Options

• Unlimited risk strategies
• Requires significant experience and net worth
• Avoid unless you know exactly what you’re doing

What Level Do You Actually Need?

For covered calls, Level 1 or Level 2 is sufficient. We recommend level 2 so you can roll. Don’t get greedy and ask for higher levels unless you specifically plan to use those strategies.

Level 1 is perfect if:

• You only want to write covered calls
• You own stock and want to generate income
• You prefer simple, straightforward strategies

Level 2 adds value if:

• You might want to buy protective puts
• You’re interested in rolling techniques (This adds a lot of value and flexibility)
• You want flexibility for different market conditions

Step-by-Step Account Setup Process

Here’s the actual process for enabling covered calls in your brokerage account:

Step 1: Log Into Your Account

For Existing Accounts:

• Navigate to account settings or trading preferences
• Look for “Options Trading” or “Trading Permissions”
• You may need to complete an options application

For New Accounts:

• Options permissions are usually part of the initial setup
• You can add options later if you missed it initially

Step 2: Locate Options Application

Common menu locations:

• Account Settings > Trading Permissions
• Trading > Options Trading > Apply
• Profile > Investment Options > Options Trading
• Help/Support > Enable Options Trading

Can’t find it? Call customer service and say “I want to enable covered call trading on my account.” They’ll walk you through it.

Step 3: Complete the Options Application

This is where most people either sail through or get stuck for weeks. The key is understanding what they’re really asking for.

Personal Information Section:

• Answer honestly about age, employment, income
• Be conservative but truthful about net worth
• Don’t inflate numbers - they may verify

Investment Experience Section:

• Focus on stock experience rather than options experience
• “2-5 years stock trading” is better than “6 months options”
• Emphasize buy-and-hold experience

Investment Objectives:

• Choose “Income” or “Conservative Growth”
• Avoid “Speculation” or “Aggressive Growth”
• “Income and Growth” is usually perfect

Options Experience:

• Be honest about your experience level
• Mention any covered call education or paper trading
• Reference courses, books, or educational content

Step 4: Request Appropriate Level

What to Request:

• “Level 2 Options” or “Covered Calls and Cash-Secured Puts”
• If given strategy choices, select “Covered Calls”
• Avoid requesting complex strategies you don’t plan to use

Sample Request Language: “I would like permission to write covered calls against stocks I own and use rolling strategies to generate additional income. I understand the risks and have educated myself on the strategy through [mention specific educational resources].”

Platform-Specific Setup Guidelines

While the process is similar across brokers, each has its quirks:

Large Traditional Brokers (Schwab, Fidelity, E*TRADE)

Typical Process:

• More conservative approval process
• May require phone interview for first-time options traders
• Usually approved within 1-3 business days
• Good educational resources available

What They Like to See:

• Steady employment and income
• Conservative investment objectives
• Some stock trading experience
• Understanding of covered call risks

Online/Discount Brokers (Robinhood, Webull, etc.)

Typical Process:

• More automated approval
• Faster turnaround (often same day)
• Less conservative risk assessment
• May have lower experience requirements

Watch Out For:

• Some platforms limit covered calls on certain stocks
• May have different margin requirements
• Customer service can be limited

Premium Brokers (Interactive Brokers, Tastyworks)

Typical Process:

• Sophisticated options capabilities
• May offer higher approval levels initially
• Complex fee structures
• Advanced tools and analytics

Best For:

• Active traders managing multiple positions
• Users who want advanced rolling capabilities
• Those comfortable with complex platforms

The Options Application: What to Say (And What Not to Say)

This is where people either get approved quickly or get stuck in bureaucratic limbo. Here’s the insider knowledge:

Questions They Ask vs. What They Really Want to Know

“What is your investment objective?”

• They’re asking: Are you gambling or investing?
• Good answers: “Income,” “Income and Growth,” “Conservative Growth”
• Bad answers: “Speculation,” “Day Trading,” “Get Rich Quick”

“How would you describe your risk tolerance?”

• They’re asking: Will you sue us if you lose money?
• Good answers: “Conservative,” “Moderate,” “I understand covered calls limit upside while providing downside protection”
• Bad answers: “High,” “Aggressive,” “YOLO to the moon”

“Describe your options trading experience.”

• They’re asking: Do you know what you’re doing?
• Good answers: “I’ve studied covered calls through educational courses and understand they generate income from stocks I own”
• Bad answers: “None, but I heard options trading is easy money”

Sample Application Responses

Investment Experience: “I have [X] years of experience buying and holding individual stocks and ETFs. I understand fundamental analysis and have built a diversified portfolio. I’m interested in covered calls to generate additional income from stocks I already own and plan to hold long-term.”

Risk Tolerance: “I have a conservative to moderate risk tolerance. I understand that covered calls provide income and some downside protection in exchange for capping my upside potential. I’m comfortable with this trade-off as part of an income-focused strategy.”

Investment Objectives: “My primary objective is generating income from my investments while maintaining moderate growth potential. Covered calls align with this goal by providing monthly income from stocks I own.”

Common Approval Mistakes (And How to Fix Them)

Here are the most frequent reasons applications get rejected and how to avoid them:

Mistake 1: Asking for Too Much Too Soon

The Problem: Requesting Level 3 or 4 options when you just want to write covered calls.

The Fix: Only request the minimum level needed for your actual strategy.

If Already Rejected: Reapply asking specifically for “covered calls and cash-secured puts only.”

Mistake 2: Inconsistent Risk Profile

The Problem: Saying you’re “conservative” but then requesting high-risk strategies.

The Fix: Align your risk tolerance with your requested strategies. Covered calls are conservative income strategies.

Mistake 3: Insufficient Account Value

The Problem: Trying to get options approval with minimal account balance.

The Fix: Most brokers want to see at least $2,000-5,000. Consider funding your account before applying.

Mistake 4: No Investment Experience

The Problem: Claiming zero investment experience when applying for options.

The Fix: Start with stock investments, paper trade options, take educational courses. Get some baseline experience first.

Mistake 5: Unclear Investment Objectives

The Problem: Vague answers about why you want to trade options.

The Fix: Be specific about covered calls for income generation from owned stocks.

Getting Started: Your First Trade Setup

Once approved, here’s how to set up your first covered call:

Before You Start

✅ Checklist:

• Options approval confirmed
• Own at least 100 shares of a stock
• Understand basic covered call mechanics
• Have chosen your first target stock and strike

Platform Navigation Basics

Finding Options Chains:

• Usually under “Trade” → “Options”
• Or click the options chain link next to your stock quote
• Look for “Sell to Open” or “STO” for covered calls

Key Information to Check:

• Bid/Ask spread (tighter is better)
• Open interest (higher is better, aim for 1000+)
• Volume (shows active trading)
• Days to expiration
• Strike prices available

Your First Trade Setup

Conservative First Trade:

• Use a stock you know well and own 200+ shares of
• Sell one contract (covering 100 shares) initially
• Choose a strike 5-10% out of the money
• Stick to monthly options initially (3-4 weeks out)

Trade Entry:

1. Navigate to options chain for your stock
2. Select your target expiration date
3. Choose your strike price
4. Click “Sell to Open” (STO)
5. Enter quantity (1 contract = 100 shares)
6. Review order details
7. Submit order

Position Monitoring

What to Watch:

• Time decay working in your favor
• Stock price relative to strike
• Days to expiration
• Opportunities to roll or close

When to Take Action:

• 7-14 days to expiration: Consider rolling if needed
• Option trading for $0.25 or less: Consider closing early
• Stock approaching strike: Plan your response - roll up and out? let it get assigned?
• Before ex-dividend: Monitor for early assignment risk (early assignment is a risk only when strike price is less than share price)

Troubleshooting Common Issues

”My Application Was Rejected”

Immediate Actions:

1. Call customer service and ask for specific reasons
2. Request feedback on what needs improvement
3. Ask about reapplication timeline (usually 30 days)

Common Solutions:

• Increase account funding
• Lower requested approval level
• Provide more conservative risk profile
• Add relevant investment education/experience

”I Can’t Find the Options Application”

Try These Steps:

1. Log out and back in (refresh permissions)
2. Use desktop website instead of mobile app
3. Call customer service directly
4. Check account settings or profile sections

”My Options Aren’t Showing Up”

Possible Causes:

• Approval still processing
• Need to accept terms and conditions
• Platform hasn’t updated your permissions
• Approval was for different account type

Solutions:

• Allow 24-48 hours for system updates
• Log out/in to refresh
• Call customer service to verify status

”I Can’t Sell Covered Calls on My Stock”

Check These Issues:

• Do you own 100+ shares?
• Is the stock optionable? (Not all stocks have options and some have very low volume)
• Are you trying to sell in a retirement account with restrictions?
• Is your approval level sufficient?

Key Takeaways

What You’ve Learned:

• Covered calls only require Level 1 or Level 2 options approval
• The application process rewards conservative, income-focused answers
• Most major brokers support covered call trading
• Common mistakes can delay approval by weeks
• Customer service can help if you get stuck
• Your first trade should be conservative and well-planned

What’s Next: Now that your account is set up for covered calls, learn how to execute and manage your first position for consistent monthly income.

Ready to Start Trading? With your brokerage properly configured, you’re prepared to begin generating monthly income from stocks you already own.

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This is Module 3 of our comprehensive covered call education series.

← Back to Module 2: Covered Calls vs Buy-and-Hold | Continue to Module 4: Managing Your First Position → | Start Your Free Trial →