We all have questions…
Depending on what you do…
…There are always recurring questions people ask about your job, such as “What’s your job like?” and “Is your job stressful, if so, how do you deal with it?
Of course, they’ll vary amongst professions … but the curiosity is there.
Since I’m in the business teaching others how to trade options…
…The one question I’m often asked is, “How much do I need to get started, if I want to trade options successfully?”
Now, I’m going to address two different answers for two different types of people … those who want to do this for a living and those who want to manage their money.
For the most part, I usually encounter people with smaller account sizes…
If you want to do this for a living, I’m going to be frank with you … this is a business where having more capital can give you better chances of generating wealth.
Similar to you having the most chips at the poker table, you’ll have more control and skin in the game…
Unfortunately, with all the rules and regulations in this business, it’s very hard for investors with small account sizes to make options trading work … that’s one calamity about this business.
There’s a generic answer you’ll hear…
…Which is just the threshold to open a brokerage account.
That is $2,000.00.
However, my answer is…
…At least $25.000, so you can avoid the Pattern Day Trader Rule.
The Pattern Day Trader Rule applies to stock and options.
Any account with less than $25,000 has restrictions … if you’re account has less than $25,000 you won’t be able to make more than four intraday trades within five business days.
You will be able to trade as many times as you need with an account size of over $25,000 … therefore, you can create more chances of making money and you’ll be able to diversify your risks.
I’m going to be honest with you … it’s going to be very tough to make a living on that value though, it’s unrealistic.
Some of you are probably wondering…
A solid bank roll would be around $100,000 of disposable capital … with this capital, you could open an account with portfolio margin (sometimes the minimum is a little more, depending on the broker).
You could use more leverage with portfolio margin, which could potentially lead to much greater returns.
With the correct management of risk and position sizes, the extra leverage will help cushion your account during times of drawdowns.
That said, you’ll still need to understand the risks and not over-leverage the account, which can be easy … if you let your ego get too big.
I’ll tell you about how that happened to me in a second.
When you’re starting out, chances are you will be losing some money … that’s all a part of the process.
It’s better to start with a smaller account and learn from smaller losses than starting off with a big account and taking big hits … taking larger hits will affect your psyche.
When I started managing money, I didn’t have a great deal of experience with trading and didn’t fully understand the risks associated with options.
I was taught to invest all the money I was managing … that proved to be a tough time during the financial crisis of the late 2000s.
I got caught up in a bear market and took large losses … I learned a lot from that experience and realized trading with more capital does not guarantee instant success.
If I could’ve done things differently, I would’ve started with a small account … that way I still would have gained experience and maybe managed the capital better and my ego wouldn’t have been so wounded.
I’m not saying this to discourage anyone that has less than $100,000 or the barebones minimum of $25,000 to actively trade … in fact, I actually encourage beginners to start out small.
When you’re learning how to trade and invest with options, understanding the risks and the amount of leverage is essential … especially with a small account.
With any account size, you should always calculate your risks and make sure you don’t over-leverage your account.
Unlike a larger account, where you’re not taking as much risk relative to your account size and have room for error … a small account has less margin for error … a few sour trades could cripple your account.
If you have a smaller account, you must understand that you’ll be taking on more risk per position.
However, as you learn and build your account, you should scale back on your positions and take on less risk, so no one position could wipe out your account.
If you have a really small account and your goal is to make money … maybe consider this alternative investment that I started on Amazon and is doing over $120,000 in sales and continues to generate bi-weekly payments into my account…
Again, I encourage people to start out with a small bank roll.
Just like they say, “Life is not a sprint, but a marathon.”
Successfully managing your money is similar to this saying … chances are you won’t be an overnight success … take things slow so you could be in this business for the long haul.
You’ll still be able to gain experience from trading a small account … but you should understand that this probably won’t change your life and you probably won’t make a living off it neither … work on your craft and process with a little bit of money before you step up and put on bigger trades and take on bigger risks.
Again, I don’t want to discourage those who have a small account … you could still start with a small account, grow that account and learn this business … just understand the limitations of a small account and be realistic with your potential returns.
Even with a small account, you’ll be learning and developing skill that you take with you for the rest of your life … best of all, you’ll be in control of and managing your money … you won’t leave the fate of your wealth to a mutual fund or a money manager.
What stage are you at on this lifetime adventure? I’d love to hear how it’s going for you in the comments section below.