When you want to trade credit spreads, your broker will require you to fill out an application with your financial information and investing objectives. No broker is transparent about the requirements on how to get approved, but if you fill in the application correctly, you increase your chances. Based on my experience applying to trade credit spreads and getting approved, here are some points to take note of. Please note that these are only suggestions and may not allow you to be approved to trade credit spreads.
Annual Income – Generally, your broker will only approve your application if you report an annual income of $150,000 or more. They likely won’t request proof of income, but you will have to sign an electronic statement saying that this information is accurate.
Investment Objective – Your broker will not approve your application unless you select “most aggressive” investment objective. This is because credit spreads are considered high risk financial instruments.
Investment Experience – You must report at least 5 years of stock trading, option trading, and credit spread experience. I realize that this is a catch 22 if you are applying for credit spreads for the first time, and you need credit spread experience to get approved. However, your broker does not want any liability in you trading financial instruments that you do not understand.
Quiz – Some brokers like Optionsxpress have a quiz that you must pass in order to get approved for credit spreads. Make sure you understand the difference between net debit and net credit and can demonstrate the maximum loss or maximum gain for any given trade. As of writing this article, Fidelity does not have a quiz.
Minimum Equity Requirement – You are required to have $10,000 minimum equity in your account to trade credit spreads. This may not affect the application process, but it will affect your ability to make trades if you are approved. You will also need to pay the maximum loss of the trade upfront every time you trade, so that your broker does not risk losing money.
Credit spreads are high risk financial instruments with the potential for consistent profits of 5 – 15% per month. However, it is extremely easy for one bad trade to wipe out all your previous gains. Trade with caution.