How much money is required to start trading options? Here’s some simple RISK CAPITAL GUIDELINES FOR OPTIONS TRADING to help you get started.
Beginning options traders often ask, “How much of my total trading capital should I devote to options trading?” To answer this question, you must decide how much of your total investment capital you are willing to use for high-risk trading. This individual decision depends on many factors, not the least of which is your tolerance for risk. If you’re conservative, allot no more than 10% of your total investment capital for options trading – and ALL beginning options traders should be conservative!
Once you’ve decided on an amount you are comfortable using for high-risk trading, commit only about 15% of that amount to any single options trade. For example, if you initially decide that of your $50,000 trading capital, you can devote $5,000 toward trading options, risk no more than about $750 in any individual trade.
When you first start trading, limit yourself to only two to three trades that are open at the same time. As you gain confidence, you can increase that up to five or six trades, which at 15% per trade would involve essentially all of your allowed high-risk capital. It’s wise to always keep a little cash in reserve for special opportunities.
As you become more knowledgeable about options, you can devote a larger portion of your total trading capital toward trades that use options. For example, you can begin to use long-term options (LEAPS if available) as a substitute for stock, even in some of the more conservative portions of your portfolio. Also you may want to use put options as a low-cost insurance for your portfolio.
Establishing your risk capital guidelines BEFORE you start options trading is a critical step to becoming a successful options trader.