How To Manage Your Capital As a Profitable Options Trader.
Updated: Sep 27, 2020
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.
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.