How Much Money Do You Need to Trade Options?

Theoretically, anyone can trade options. Ultimately, there are options on the list that you can purchase for as little as $1. 00. Thus, how much money is the appropriate minimum required before you can formally take a look at options trading and give yourself a reasonable chance of making money?

You have the money to afford it, so why not buy an option for $50 if you have $100 in your trading account and want to do so?

The answer isn’t that simple. Possibly your view of the market is incorrect and your option expires worthless. You’ve just lost 50% of your trading capital. You will lose the game if you lose one more $50 option.

Clearly, it is unsustainable to risk 2050% of your capital on a single trade; instead, you should become an options trader, not someone who uses options to gamble; a much more moderate risk per trade is warranted.

Though each person’s response to the question of how much they need to trade options will vary depending on their approach, available funds, risk tolerance, etc. the key to the solution is to consider the relationship between win rate and bet size. We’ll get into this in a moment.

However, in addition to strategic and probabilistic considerations regarding the amount of risk you can or should take on a trade, brokers, exchanges, and governments have regulations dictating the minimum amount required to trade specific options strategies.

Thus, the answer to the question of how much capital you need to trade options is, as usual—and maybe a little annoyingly—“it depends.” ”.

Let’s clear up a few basic statistics before assessing your win-rate, risk tolerance, bet size, and other factors.

You must have at least $2,000 in your trading account to make option trades that require margin.

Here is a list of options strategies that you can use without using margin, as most strategies require it:

That’s your first hurdle. In the event that your plan calls for selling options altogether or using option spreads, you will require the $2,000 needed for margin trading in the US.

You are essentially forced to purchase puts or calls with less than $2,000 because an account that small is unlikely to be able to sell covered calls or puts that are secured by cash.

If you ask most full-time options traders, you’ll find that very few of them just buy options as their primary trade. To make trading a full-time job, one must be consistently accurate about the market’s direction, the size of the move, and the timing of the price change.

But, it’s a respectable way to increase your account if that’s your only choice and you’re dedicated to learning how to trade options and growing your account.

This could indicate that you have a limited range of tradeable assets if you have a small trading account. You can’t trade high-priced, or possibly even moderately-priced stocks.

But you’ll probably discover that there is a sizable enough universe of potential stocks. This FinViz screen reveals that there are more than 400 stocks with listed options that trade over a million shares a day and are priced between $1 and $10. There are still more than 200 stocks when the range is reduced to $1 to $5.

For illustration purposes, let’s say you have a $1,000 trading account and you find a call that you want to purchase for $30. The amount of money you risk each trade is three percent of your account, which is somewhat aggressive but acceptable when your account is so small.

To keep your bet size modest relative to the size of your account, it’s critical to concentrate on inexpensive stocks, and I’ll explain why.

What is Your Strategy?

You can craft nearly any market view using options. Options include time and volatility in addition to a stock’s price movement, enabling you to precisely tailor your position to your viewpoint.

You can use a calendar spread if you’re bullish for the next month but bearish for the next two weeks of price action. Additionally, you can create a net-short position in volatility if you believe that it is currently expensive by purchasing a put with about ten days until expiration to express your short-term bearish view and selling a put to express your intermediate-term bullish view.

The key idea is that options are a tool with countless tactics and applications. The capital required varies depending on the strategy you’re implementing.

Whether or not you trade spreads with a defined maximum risk is the most fundamental distinction.

When you trade options with an arbitrary maximum risk level, it becomes challenging to chart the worst-case scenario. If you are unaware of that, it will be difficult for you to determine the appropriate stake size. Furthermore, it is occasionally possible to appropriately size your bets and yet blow up your account with ill-defined risk trades. Consider the case of OptionSeller. com.

Moreover, a lot of vague risk management techniques are comparable to offering hurricane insurance. Keep collecting small premiums until the hurricane hits. The question of whether you collected enough premium to cover your claims is very challenging to respond to.

Your Risk Tolerance: How Much Should You Bet?

As previously stated, the amount of money needed to attempt to trade options profitably on a regular basis depends on the size of your wager. Put differently, what proportion of your overall trading capital do you risk on a typical trade?

Although there isn’t a clear-cut right answer in this case, you can use common sense to determine some obviously incorrect responses. Half of your trading capital shouldn’t be lost on a single transaction. Trading edges almost never justify that level of bet sizing, unless you’ve found some crazy arbitrage or you’re breaking the law in some other way.

By applying the Kelly Criterion, we can generate a greater number of incorrect responses, which will guide us toward the right response.

Let’s start with a simple example. We are examining a potential trade and determining how much to bet if we decide to proceed with the trade.

The trade is a bull call spread.

• Max loss is $88
• Max profit is $112
• 28 days to expiration
• Implied volatility is 25%

Here’s the payoff diagram so you can get an idea:

Maybe we believe that there’s a 45% chance that we’ll exit the trade with our maximum profit and a 5% chance that we’ll incur the maximum loss on this trade.

We can simply enter those numbers into a Kelly Criterion calculator like this one and find that a Kelly bet here would be roughly 2% of your trading capital. That sounds pretty reasonable, after all, this edge is pretty small.

However, let’s observe what occurs if we increase the drama of the numbers. Using the same trade example, let’s revise our assumptions and estimate that we have a %2075% chance of making the maximum profit.

Based on these suppositions, the Kelly Criteria recommends that you stake at least 25% of your trading capital.

Hopefully, it’s clear to you how much it can harm you to make incorrect assumptions. It is essential that you discount your odds in proportion to your degree of uncertainty because you can never know your true odds in the market.

An experienced options trader who has made 2,000 trades in a particular strategy database can be far more confident in his assumptions than a novice trader who is primarily speculating on their odds.

A seasoned trader’s past performance essentially never advises him to risk even nearly half of his account on a trade.

Because of this, most traders that use a bet sizing formula such as the Kelly Criterion never use “full Kelly,” preferring to use half, a quarter, or even a tenth of full Kelly, contingent upon their degree of aggression and edge confidence.

As you can see, choosing the right bet size can be difficult in trading because it’s one of the most important things to get right—or at least not get wrong. Always err on the side of caution and place a smaller wager than your math suggests.

It is likely that a novice or even lower-intermediate options trader will find it difficult to estimate what they believe to be their edge. They may even wonder whether their advantage is substantial enough to be quantified because they are still unsure of it. That’s alright; traders generally operate on a spectrum, with no one being completely certain of their edge; you simply gain more assurance.

To stay in the game in this situation, it’s best to keep your bet size small. Reputable traders and mentors usually advise risking one percent of your capital on each trade. If you’re not sure, stick to taking a trade risk of 1% or less.

How Much Money Do You Need To Start Trading Options?