The first step toward intelligent money management is to trade ONLY with that portion of your capital that can be comfortably devoted to speculation. So if you are going to trade options, it should only be with money you do not need for other things - money that you can lose without it affecting your quality of life. Naturally, the goal is to make money, not lose money, but you must always remember that trading options has inherent risk.

Never commit a large portion of your trading capital to a single trade. This rule holds true no matter how successful your trades have been or how attractive the next trade appears to be. THERE WILL ALWAYS BE LOSING TRADES. NO TRADE IS A SURE THING.

Always keep a large portion of your investment capital in reserve. By doing this, you will then have the staying power to always remain in the game!

Our Money Management Strategy

Our Money Management strategy involves having a trading account and an equal or larger size reserve account. For example, we start with $10,000 in a trading account and $10,000 in a reserve account. You can start with less money in the trading account, but keep at least as much money, if not more, in the reserve account.

For each trade, buy the number of options that $10,000 can buy. If necessary, round down - the trade, including the commission, should be no more than $10,000 (for example). If the first trade is a win, move the profits into the reserve account. If the first trade is a loss, borrow enough from the reserve account to restore the trading account to $10,000. The first goal is to double the money in your reserve account from $10.000 to $20.000 (your original total). At this point you will be trading with pure winnings. This provides a psychological comfort level and feeling of confidence.

The reserve account remains to get us through the losing trades. We borrow from it when necessary and pay it back with profits. When the reserve account grows beyond $20,000, we can leave some of the profits in the trading account, and increase our trades to $15,000 (for example).

The idea is to keep a significant amount of money in the reserve account so that we can sustain several losses in a row (this will happen) and continue to trade.

Keep your trading account at a level that is comfortable for you, a level that allows you to sleep well at night. As profits permit, take money off the table and put it into a retirement account or a college fund for your children.

Trade sensibly and familiarize yourself with the risks of option trading which are clearly presented in the Characteristics and Risks of Standardized Options, a document available from the Options Industry Council (click on the hyperlink to download).

If you follow these guidelines, you will find options trading to be not only profitable, but enjoyable.

May the swing be with you.
Larry Swing