Investors and traders trade options either to hedge open positions (for example, buying put options to hedge a long position or buy calls to hedge a short position) or to speculate on possible price movements of an underlying asset. Deed to sell is a favorite strategy of advanced options traders, since, in the worst case, the stock is assigned to the put option writer (they have to buy the stock), while the best case scenario is that the writer withholds the full amount of the option premium. Many people new to options trading make the mistake of investing too much of their money in the new business. Brokerage firms evaluate potential options traders to assess their trading experience, understanding of risks, and financial readiness.
Use options to negotiate one-off events, such as corporate restructurings and spin-offs, and recurring events, such as the release of results. Regardless of whether you incorporate options tools or advanced methods when deciding how much money to invest in an options trade, you should always stay within your risk tolerance. Generally speaking, most investors should only consider allocating a relatively small percentage of their total portfolio to an options trade. Buying options with a lower level of implied volatility may be preferable to buying those with a very high level of implied volatility, due to the risk of a greater loss (payment of a higher premium) if the trade fails.
However, if you're willing to get the education and do the hard work needed to make money on it, options trading can be very rewarding and profitable. When it comes to deciding what is the right size for an options trade compared to, for example, a stock or ETF purchase, the unique fundamentals of options dictate that you need to be especially careful. Options have an unfair perception because people don't take the right time to learn how to trade them. A longer maturity is also useful because the option can retain the time value, even if the stock is trading below the strike price.
There is something to be said about keeping a close eye on your money, and I firmly believe that if you invest more money, you will invest more in learning how to trade options more intelligently. Owning the shares turns a potentially risky trade, the short call, into a relatively safe trade that can generate income. Honestly, the size of your trading account has no bearing on whether you are or will be a successful options trader.
