-- 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) 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 LimitationsThat 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.
It's All Just Paper AnywayOne thing you might consider is doing some paper trading, whether it be through a mock account with a broker such as OptionsXpress or simply tracking the OptionsAlert Newsletter. This will help you gain a better understanding of what strategies make sense and meet your comfort zone in terms of size and risk, and it will let you see how trades are executed and the impact of costs on returns. I've written previously on the benefits and drawbacks of
Finding a Way to UnwindI enjoyed your article on a ratio spread on Valero. The part I am trying to understand is how to protect against the unlimited risk if the underlier goes too high. In the Valero example, $114 is the break-even point. At what point would you unwind this position and how would you do it?Thanks,
Tim Tim, we all unwind in different ways; there's no one right way to trade. This includes both deciding what trades to initiate, and subsequently, how to take a graceful and hopefully profitable exit. Ratio spreads, like the one described in