Options Forum: You Can Play With Five Grand

It's been a while, but the Options Forum is back! After a brief hiatus, in which I sought guidance from the big Specialist in the Sky, the Forum is now ready to resume answering questions, sharing knowledge (within our limits of understanding) and hopefully shedding light on how embracing options can provide a more fulfilling investment experience.

Aloha Steve,

I am very interested in options. However, at this time I have only $5K to invest in options. Is this amount acceptable for a beginner like myself? I would definitely apply for your free trial.

Thank you for your comments.
-- Edward

Aloha and shalom to you, too, Edward. Yes, you can start trading options with as little as $5,000. There are several brokers, from Scottrade to OptionsXpress(OXPS Quote) to JimmyontheCorner (kidding about that last one) that have account minimums as low as $5,000. But be aware, opening an account with limited capital will come with restrictions, some imposed by the brokerage firm and standard margin rules. Other constraints will be of an emotional or mental nature.

A Man's Got to Know His Limitations

That said, restrictions might not be such a bad thing, especially for someone just starting out in options. It will force you to keep strategies simple and the risk limited, and require you to understand the parameters for each trade before initiating a position. For example, your trades will be limited to buying options that have a risk equal to the options purchase price, and you will not be able to short options, even as part of a spread transaction.

A positive byproduct of this restriction is that it should push you toward doing more research, and understanding the impact of transaction costs, both commissions and execution prices (paying the bid or selling on the offer can be the difference between a profit and loss). It also should lead you to consider taking a longer-term approach. All said, a limited bankroll should lead you to using trading strategies in line with your learning curve. And then when you have plenty of money, you can make all the mistakes you want.