How much money would I need to start investing in option trading?
When I first started option trading, I started with more than $3,000 per trade. And when my trade was a lost, I wasn’t mentally prepared for a trade go down -40% in a blink of an eye. So for a beginner option trader, what is an appropriate amount of money to trade?
The answer I always tell starters is, start between $500 – 1,000 (if feasible).
I added “if feasible“, because I wouldn’t trade any money that I need for bills or food.
Aside from that, let’s get into why I recommend $500 – 1,000.
Option trading is all about controlling your emotions
I’ve read a lot of articles and seen a lot of videos that try to break down mathematically how much you should start investing based on how much you want to make. But what they all forget to tell you is the emotional roller coaster ride you have to deal with during and after a trade.
I’ve been option trading in the stock market for more than a year now, and I can say that every time I’ve learned to control my emotions when I see my contracts going into red.
I used to fear making trades because I was scared of losing all my money. But over time I learned to get comfortable seeing my contracts in red and letting the contract play itself out.
You don’t have money problems, it’s a you problem.
If I lose money it’s okay, I move on to the next play. I don’t look back at my losing trades. Losing trades is part of the game, but how you deal with those losses is the key.
From my own personal experience I believe $500 – 1,000 is a great amount of money to get a feel for option trading. If you lose a trade, the loss won’t be so massive that it will discourage you from trading; Given that you have solid option trading rules.
Once you get comfortable losing $200, $500, $1,000 AND as you become a better trader, you will be able to add a heavier position size to a trade.
Remember, the key is to get comfortable to be in red trades and riding the wave to green. Wins are important, but learning to take losses are more important.
If you’re starting, I don’t want you go into a trade thinking you’re gonna lose the full position. That should NEVER be the goal. So here’s a basic option trading plan that I use for trading.
Basic option trading rules
These are my option trading rules that I follow every single time I make a trade:
And yes, it’s written on a sticky note, on my monitor to remind me. Because even though I’ve been doing this for a long time, my emotions may try to get the best of me at times, and this sticky note will remind how I got to where I’m at in the first place.
Position size: $500-$1,000 or max 10% of portfolio size
I recommend starting with $500 to $1,000 on a trade. Max is 10% of a portfolio.
It’s about having consistent position size. The more consistent you are, the better the chances of you succeeding this game are.
It’s about becoming the house, not the gambler.
Set stop loss at 15-20%
I’m not sure where I got this image from, but this is a great image that depicts how much the win has to be to recover from a loss.
My stop loss is no less than -20% because from my experience. If I’m swing trading, I may let it go to 30-35% in the red. Depending how much conviction I have on it.
The reason my stop loss is no less than -20% is because it will allow me to have more trades with the capital that I have.
For example, let’s say I have an account of $1,000 and I buy a contract for a total of $100.
That 20% of $100 is $20, essentially only losing $20 out of $1,000. That’s only a 2% loss on my portfolio and leaves me a lot of capital to stay in the game.
Take profits at 15-30%
It’s very easy to get caught up in the high percentages but that’s not realistic. Take the what market gives you otherwise it will take your money.
Take some profits at 15%. Take the rest at 20-30%. Don’t be greedy.
Number of trades: 1-3
Over my experience I’ve come to find out that my best trades are my first 3. After that, they’re garbage.
If you get 3 out 3 wins, call it a good day, and walk away.
If you get 3 out 3 losses, walk away.
Breaking any of the rules above, goes back to trading with your emotions, and you want to avoid that at all cost. My biggest losses has always been because I broke one of my rules.
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