How To Manage Your Capital As a Profitable Options Trader.
Updated: Sep 27
This is one of my favorite articles I've written. Enjoy.
Let's say you have $10,000 and you just got approved for options trading! Nice, let's go!
What do you do now? Do you follow other peoples’ trades? Do you do your own trades?
Either way, you need to properly manage your money or you'll end up like 90% of options traders, with a blown up account.
Step 1. Identify Your Risk Tolerance
Risk tolerance is basically how much you're willing to lose from your whole balance.
How much are you comfortable losing?
10%? 30% ? 99%?
To have the mindset of a profitable options trader, you must be comfortable with losing 100% of your money when you begin.
The Golden Rule is: NEVER INVEST MORE THAN YOU CAN AFFORD TO FULLY 100% LOSE.
Yes thats right, you will lose 100% of your balance when you start.
This is due to greed, fear, emotions, and general human flaws.
There is no escaping this, unless you have proper capital management, or spoon fed trade ideas, like we give out at SmartOptions AI to our Premium members, you will fall victim to your emotions.
In reality, no one is comfortable with losing any of their money, but, before you go into your first options trade, you need to identify how much you're willing to spend of your hard earned capital and make sure you're willing to lose 100% of it or do not invest at all.
Step 2. What's My Budget Per Trade
Before you begin trading, you must decide how much of your balance you would like to risk into 1 given trade for what expected profit.
How much are you willing to risk per trade to generate what return?
What if you risked 10% of your balance going to 0 for a possible 30% gain?
What if you risked 2% of your balance going to 0 for a possible 200% gain?
Let's do some calculations.
With starting balance of $10,000, and risking 10% for a possible 30%, you're risking $1,000 to make $300.
You are risking $1,000 to make $300. That is not good.
With starting balance of $10,000, and risking 2% for a possible 200%, you're risking $200 to make $400. Nice! That is a 1-2 risk to reward trade!
Meaning, for every 1 level of risk you take, you're getting 2 levels of reward!
These are the types of trades you need to find consistently.
This is your job. Unless of course, you're a Premium SmartOptions® member, we give amazing risk to reward trades consistently.
The more reward you get for 1 level of risk, the better!
Step 3. What's My Stop Loss Per Trade?
How much are you willing to lose per trade before you cut your loss.
Do you even use a stop loss?
I'm going to tell you a secret that no one else will.
The big options traders, do not use a stop loss, or they use a very very loose one.
Why is that?
That is because they are willing to risk the full amount for the full reward of a trade.
They already know they are risking X units of risk for X units of reward.
They are prepared to lose the 1% or 2% of their balance they used for a 200% reward.
This is the mindset you need to have as well.
Step 4. Am I Losing Right Now Or Winning?
As an options trader, your main goal is to generate income from your trades.
Most options traders, fail. Barrons.com reports, 90% of options traders are at a net-loss.
You enter a position, and before you know it, you are at a huge loss.
What do you do now?
You've heard your friend talk about dollar cost averaging, buying more at a lower price to get your total entry price lower.
DO NOT DO THIS.
If you are in a losing trade, it usually means you have picked the wrong market direction and will continue to lose your money!
Now let's inverse the situation.
You enter a trade and now you see profits. Woohoo!
What do you do now? Do you exit your position and take your profit?
You are now in a position a lot of people wish they were in.
The best thing you can do is watch your position in real-time and let your profits grow over time.
You can now also add to your position. You've correctly identified the right direction, usually the direction keeps going in that way.
Step 5. When Should I Withdraw My Profits to My Bank?
Congratulations! You've made money with your options trades and are now looking to withdraw your money.
How should you proceed? Do you withdraw immediately?
We recommend take profits consistently until you can pay yourself back your initial $10,000 balance plus fees and capital gains taxes.
Once you have withdrawn your initial investment plus a little bit more to pay any taxes, you are now trading with profit-capital!
This is the state you will find yourself in once you become a profitable options trader.
We recommend you withdraw your profits from our SmartOptions® AI Trades every month.
As an options trader, your job is to manage risk as well as managing your capital.
By managing your capital well and insuring great risk to reward levels on your trades, you greatly increase your chance of being in the 10% or less of traders that actually are net profitable over time.