This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Money Management for Options Traders

TheStreet Premium Services

A complimentary preview
of Options-Profits Previews

In a way the key to making money is all about position sizing. For positions that are likely to turn out to be losers we want a position size of zero. So in that sense position sizing is everything.

My simple plan for option traders is to figure out how many trades you can monitor at one time. Then subtract 20% of your capital as a cash cushion for emergency contingencies. The remaining 80% of your capital should be spread evenly into the number of positions you have. So if you choose to have 20 positions the margin for each one would use up 4% of your capital.

Sometimes it happens that all your capital is used up but there is a new opportunity that you would like to pursue. It makes sense to close out an old trade if it is profitable and has little profit left in it. For example we made an investment by selling the Phillips (PSX) April 55 puts. The option is now quoted at $0.05 bid and $0.10 asked. The margin is still $550 for this position. Using the $0.10 price tells us that there is less than 2% profit remaining in this trade. So it would make sense to close this trade if we found another that has a 10% return over a comparable period.

OptionsProfits can be followed on Twitter at

EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Real Money
Try it NOW

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Top Rated Stocks Top Rated Funds Top Rated ETFs