Level 4 options trading represents one of the highest risk, most advanced, and complex tiers of options trading, typically allowing investors to trade "naked" or uncovered options contracts. This level is designed for experienced traders with high-risk tolerance and significant capital, often requiring margin approval.
The fourth level, also known for buying and writing naked options is the highest level of options trading. Buying and writing naked contracts has the highest levels of risk associated with them among all levels of options rating. Both parties are exposed to elevated levels of risk, the option traders and the brokers.
To place a naked equity call or put trade (Levels 3 and 4) you must have margin equity of at least $5,000 in your margin account. At Levels 3 and 4, margin customers will be allowed to enter naked short put positions.
IV Rank: Measures where today's implied volatility sits compared to its range over the past year (high minus low). IV Percentile: Shows the percentage of days in the past year when implied volatility was lower than it is now.
The "24-year-old trader making $8 million" refers primarily to Jack Kellogg, a successful day trader who reported over $8 million in gains from trading in 2020 and 2021, starting with just $7,500 and leveraging key indicators like VWAP, support/resistance, volume, and linear regression for simple, adaptable strategies. His story highlights achieving significant returns by weathering different market conditions, learning from losses, and sticking to core principles rather than overcomplicating things.
Similarly, when traders do not protect themselves vigorously against strong market changes, their IVs fall. The majority of traders are comfortable with IVs of 20% to 25%.
Is high IV good or bad? High Implied Volatility (IV) can be both good and bad, depending on your position. For option buyers, high IV might be beneficial due to potentially higher profits, but it also means higher premiums. For sellers, high IV increases risk but offers higher premium income.
Implied volatility rank is generally considered to be elevated (i.e. “high”) when it is greater than 50. Extreme levels in IV rank would be 80 and above. Alternatively, when implied volatility rank is depressed (<20) that may be viewed as a potential opportunity to buy options/volatility.
Under FINRA rules, pattern day traders must maintain a minimum account value of $25,000.
Standard commissions for stock and options trades are $0 (plus an additional $0.65 per options contract). For options orders, an options regulatory fee will apply.
There's a common misconception that options trading is like gambling. I would strongly push back on that. In fact, if you know how to trade options or can follow and learn from a trader like me, trading in options is not gambling, but in fact, a way to reduce your risk.
Level 4: Long-term Investors
Long-term investors are those who have a long-term investment plan and are engaged in that plan to ensure it helps their financial objectives. They are generally very conservative people (i.e. no fancy cars or houses) and have well-balanced financial habits.
Every trader goes through five distinct stages on their journey, from the dopamine-fueled excitement of starting out to the crushing doubts of the valley of despair. This episode dives deep into each stage—Uninformed Optimism, Informed Pessimism, the Valley of Despair, Informed Optimism, and finally, Achievement.
After you've done your research, you could identify options with high implied volatility that you might consider selling. You can sell options and still be bullish or neutral. As we mentioned before, this can improve your breakeven (compared to selling premium in low implied volatility environments).
Buying an option, or “going long,” will have less risk than selling, or “shorting,” one, since your potential loss is capped at its premium while your gains could be unlimited.
The 3-5-7 rule in trading is a risk management guideline: risk no more than 3% of capital on one trade, keep total risk across all trades under 5%, and aim for winning trades to be at least 7% larger than losing trades (or a 7:1 ratio) to ensure profits outweigh losses and protect capital. It promotes discipline, reduces emotional trading, and balances potential high rewards with controlled risk, making it great for beginners.
Warren Buffett views market volatility not as risk, but as opportunity, telling investors to see price swings as a friend to buy quality companies cheaply during downturns, rather than something to fear or avoid, emphasizing that a tolerance for short-term fluctuations improves long-term success and that focusing on a company's intrinsic value beats reacting to market noise. He treats dips like sales events and suggests staying disciplined and patient, viewing big drops as normal over the long haul, and even welcoming them for long-term prospects.
Implied volatility is expressed as an annualized percentage in options trading. If a stock option has an IV of 20%, it means the market expects the stock price to move up or down by 20% over a year. This annual implied volatility can be converted into a daily or weekly expectation using standard deviation.
The "90-90-90 rule" in trading is a harsh reality check stating that 90% of new traders lose 90% of their money within the first 90 days, highlighting the high failure rate due to emotional decisions, poor risk management, and lack of education/strategy. It serves as a cautionary tale, emphasizing that success requires discipline, a solid trading plan, continuous learning, and strict risk control (like risking only 1-2% per trade) to avoid the common pitfalls that wipe out most beginners.
Takashi Kotegawa, also known as BNF, is a legendary Japanese day trader who famously turned an initial capital of around $13,600 into an astounding $153 million in approximately eight years.