I get this question a lot from new traders, so I wanted to take the time to cover it in more detail. Many people new to options trading make the mistake of investing too much of their money in the new business. A key part of a financial education is understanding the basics of risk management with respect to your entire portfolio, specifically how your income capabilities and your risk tolerance should determine your options trading allocation.
The Importance of an Emergency Fund
Before you even think about trading options (or any other investing for that matter), it is essential that you have set aside an adequate emergency fund to prepare yourself for the unexpected events.
Although many experts may debate the actual amount of money needed in such a fund, the consensus is that you should be able to support yourself for 3 to 6 months from your emergency fund.
Since an emergency fund is designed to protect yourself in case of an emergency, that cash should be easily accessible in a highly-liquid savings account or money market fund.
Under no circ*mstances should you think about investing these funds in options. Given the risk management characteristics of emergency funds, this cash should only be placed in accounts that have very little risk attached to them.
And never make any excuses as to why you "need" to take money out of it. It shouldn't be used for a new car purchase or a new iPad.
Where To Find Money to Invest in Options
Once your emergency fund is fully funded, you can start to think about the cash that is available to you for options trading. If you have any additional savings that are not a part of your emergency fund, this cash could conceivably be used as part of your allocation towards options trading.
In addition, I would make it a point to include or at least allocate any future income that you earn from your current job to grow your portfolio. Budget out your monthly expenses and include a line item for the "trading fund."
That's why my wife and I do each month. We allocate 5% of her pay to the "trading fund" and, of course, all my income just stays in there except what we pull out for my personal salary to myself.
Regardless of how you allocate, the key here is to find something you can consistently put towards your future. If that means skipping a Starbuck's latte each week then say goodbye to those delicious pumpkin spice lattes!
So What's The Magic Number Kirk?
Back to that question everyone asks: "How much should I invest?" I would say at least $5,000.
Honestly, this is just a guidepost and not a requirement but here's how I got there. . .
First, you don't need a million dollars (or anything close to it) to be successful.
But that said, to start with no money or very little money makes it extremely hard to get some consistency in positions. With less than $5,000 you might only end up trading 1 or 2 positions per month, which is frankly not enough to generate income to cover commissions.
Lastly, at least $5,000 puts enough skin in the game that you take this seriously. There is something to be said about watching your money closely, and I firmly believe that if you have a bigger chunk of money invested you are going to be more invested in learning how to trade options smarter.
6 Extra Things to Consider
Although such a broad-based education in personal finance could take a lifetime to learn, a few key lessons that I have learned along the way and wanted to share are as follows when it comes to allocation of funds:
- Always have an adequate emergency fund of at least 3-6 months
- Do not invest in anything you don't understand. (Hence why we offer free education)
- Keep all of your positions sizes small for a reason - because you make more money
- Diversify your investments among asset classes, strategies, and timelines
- Never invest money you can't afford to lose (beginners pay attention here!)
- If you worry about risk management first, the profits will take care of themselves
Options trading is an inherently risky financial activity that should only be pursued by those people who have developed effective risk management and asset allocation strategies.
However, if you are willing to obtain the education and perform the hard work necessary to make money at it, options trading can be a very rewarding and profitable.
FAQs
Most brokers require account sizes of $2,000 or less. However, trading an option account with only a few hundred dollars is not prudent. Option trading strategies work best when a trader employs only a small amount of their available capital on any one trade.
Can you trade options with $100? ›
If you're looking to get started, you could start trading options with just a few hundred dollars. However, if you make a wrong bet, you could lose your whole investment in weeks or months. A safer strategy is to become a long-term buy-and-hold investor and grow your wealth over time.
What is the minimum money for option trading? ›
You don't need a considerable sum of money to become an options trader. You can start small with a capital of less than Rs 2 lakhs too. However, as you start small, you need to be a careful trader so that you can cut down on the possibility of losses and enhance the return potential of your trades.
Can I start trading options with $500? ›
Yes, you can trade options for only $500, but it is important to note that options trading involves significant risks and may not be suitable for everyone. Online brokers like Robinhood and TD Ameritrade offer commission-free options trading and allow you to start trading with no minimum deposit.
Can you start day trading with $100? ›
Can You Start Trading With $100? Yes, you can technically start trading with $100 but it depends on what you are trying to trade and the strategy you are employing. Depending on that, brokerages may ask for a minimum deposit in your account that could be higher than $100.
Can you make $200 a day trading? ›
A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline. Sure, you'll hit a big winner every now and then, but consistency is the real key to day trading.
Can you buy options for $1? ›
Most options allow you to buy or sell calls and puts at many different strike prices. If XYZ stock is trading at $50, an in-the-money 40 strike price might cost $15 per contract, while an out-of-the-money 60 strike price might only cost $1 per contract.
Is options trading worth it for beginners? ›
Options trading may sound risky or complex for beginner investors, and so they often stay away. Some basic strategies using options, however, can help a novice investor protect their downside and hedge market risk.
Is options trading worth it? ›
Trading options offers a number of benefits for an active trader: Options can offer high returns and do so over a short period, allowing you to multiply your money quickly if your wager is right. With options, it can cost less to get the same exposure to a stock's price movement than it does to buy the stock directly.
How much do beginner options traders make? ›
How much money can you make trading options? It's realistic to make anywhere between 10% – $50% or more per trade. If you have at least $10,000 or more in an account, you could make $250 – $1,000 or more trading them. It's important to manage your risk properly by trading them.
It's realistic for an options trader to make at least $100,000 per year or more full-time, but it's important to realize that most traders won't make this amount. It takes hard work, mental discipline, and proper capital for a trader to make this kind of money.
Can you become a millionaire trading options? ›
Can you get rich trading options? The short answer is yes. However, options are more involved than stocks. As a result, you have to put in time to develop a winning strategy.
Do you need $25,000 to trade options? ›
You can day trade without $25k in accounts with brokers that do not enforce the Pattern Day Trader rule, which typically applies to U.S. stock markets. Consider forex or futures markets, which have different regulations and often lower entry barriers for day trading. Swing trading is another option.
How can I turn $100 into $1000? ›
10 best ways to turn $100 into $1,000
- Opening a high-yield savings account. ...
- Investing in stocks, bonds, crypto, and real estate. ...
- Online selling. ...
- Blogging or vlogging. ...
- Opening a Roth IRA. ...
- Freelancing and other side hustles. ...
- Affiliate marketing and promotion. ...
- Online teaching.
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Can you make 100k a year day trading? ›
But, those who follow strict trading rules can easily make an income of over $100,000 per year or more. Likewise, the national average salary for day traders who work for a company is $122,724 (source: Glassdoor). You can see below that this average varies based on where you work.
How many lots can I trade with $100? ›
When you trade forex with $100, it's recommended to open trades of no more than 0.01-0.05 lots so that risks should not exceed 5% of the deposit amount. To trade forex with $100, you will need the maximum leverage to lower the margin amount blocked by the broker.
Do you need 100 shares to trade options? ›
Stock options are traded on exchanges as contracts that entitle, but do not require, the owner to buy or sell 100 shares of the underlying stock at a fixed price any time before the predetermined expiration date. Options come in two types, puts and calls.
How much money do I need to make $100 day trading? ›
You're really probably going to need closer to 4,000 or $5,000 in order to make that $100 a day consistently. And ultimately it's going to be a couple of trades a week where you total $500 a week, so it's going to take a little bit more work.
Are options sold in lots of 100? ›
Usually, options are sold in lots of 100 shares.
