I get a lot of questions from students about how to start trading options…
No surprise there. The options market is complex with far more factors to consider than the stock market.
This is why most people start trading stocks first before discovering options. I was no different…
It wasn’t until several years into my career that I had my ‘a-ha moment’ with options trading.
And just like you, I had a ton of questions when first approaching puts and calls…
How much money do I need to start trading options? How should I size my positions? When do I take profits?
As we enter a new year, I know many traders are actively starting new accounts while others simply need a reminder about how to do it.
Keep reading and I’ll show you how to start trading options the right way.
Open Separate Accounts
If you trade common shares — or own long-term investments — it’s a good idea to start a separate account for options trading.
The first reason is for your bookkeeping. It’ll be much easier to track your profit and loss numbers across different markets if you have your funds in separate accounts.
By having one account for long-term holds, one account for short-term stock trades, and another for options trading … you’ll go a long way toward eliminating confusion for yourself.
If you keep your accounts separate, it should be easy to see which parts of your trading need improvement (and which aspects are thriving).
Plus, when it’s time to do taxes, you’ll have much less organization to deal with.
Don’t Overfund Your Options Trading
One of the best parts about options trading — and a major reason why I recommend it to anyone with a small account — is that you don’t need a ton of capital to start.
Take my trading, for example…
Last year, I took a small account from $10,000 to $130,000+ in a little over a month!
But think about it. You don’t need $10,000 to do this…
You could’ve turned $1,000 into $13,000 — or $3,000 into nearly $40,000 — using the same game plan.
This is because, unlike stock trading, the upside on options is enormous.
It’s not uncommon to see weekly options move 100-200%+ in a single trading day!
Knowing this, why would you dump a ton of money into your options account before proving you can win consistently?
Doing this only sets you up to lose more than you’re willing to.
I suggest never depositing more than $3,000 into your options-trading account.
If you grow that number exponentially, I promise you won’t be worrying about how much more you could’ve made had you made a larger initial deposit.
On the other hand, if you overfund your account and lose it all … it could turn you off from options trading altogether when it was really your account sizing that led you astray.
Keep your account small in the beginning. Then, prove that you can grow it.
Focus on Your First Few Trades
When starting an options account, your first few trades are exponentially more important than any others you’ll make.
Again, this has to do with the massive upside (and downside) that’s possible with options contracts…
If you’re extremely discerning with your initial plays — and find some strong winners early on — your account could multiply several times in a very short period.
But the opposite is true as well…
If you get trigger-happy and make subpar trades in the beginning, your capital will disappear faster than a speeding bullet.
With a fresh small account, you have limited rounds in the chamber, so to speak…
This means you must be extra cutthroat about the trades you make (and don’t) when you’re trying to build it up.
Nail your first few plays and you’ll have cleared one of the biggest hurdles in the game…
Fail to profit on your initial trades and you’ll be re-funding your account in no time.
If you’re trying to grow a small account — options trading is the fastest way to do so.
That said, you must be cautious. The options market provides huge potential upside, but also huge potential downside…
Keep your accounts separate, don’t overfund, and be very specific about the first few trades you choose to make.
By following these rules, you’ll be setting yourself up for major options-trading success.