Trading Capital Management

Options Trading Strategy
– Number of Contracts VS. Equal Cost -

by Ian Harvey

Trading capital management is a key component of your trading strategy. The strategy on which we base our trades to achieve maximum profit, and to minimize loss, is contingent on using an equal amount of money for each trade.

Many new traders fail to consider the fact that it is wise for portions of their capital to be evenly distributed among the trades they are entering. Even experienced traders may be caught out by investing a higher amount of trading capital in a trade which turns out to be unsuccessful, or under-investing in other trades which succeed and could have covered or surpassed the loss sustained in the losing trade. Think of the adage regarding putting all your eggs (or even a greater percentage of those eggs) in one basket.

The way to maximize your potential profit is to allocate a specific amount of your trading capital that you wish to dedicate to each trade, and then calculate the number of contacts that this figure enables you to enter.

It is not the number of contracts in play, but the amount of money used to execute each trade!

PATIENCE PAYS OFF!

YOU NEED TO BE IN TO PROFIT! 

An Example of Balanced Trading Capital Management

Let us view a past example of a list of options trades executed…..at this stage ignoring fees encountered (obviously the more contracts the higher the fees – depends on the brokerage being used).

Example 1…..buying in equal lots….in this case 10 contracts…..

 The TOTAL COST is $4,350.00.

As an example if we take the first 4 trades -- AMD, GME, HBI and HPQ -- this total cost is $1,910.00.

Now, assume that these have all been on track and you made 100% on each; this provides a profit of $1,910.00.

But, then you lost on DKS and LB -- totaling $2,440.00 (the 2 that cost the most) - you are still left with a loss of $530.00.

Not looking good!

Example 2……

Therefore, take a different strategy and buy all the trades at a similar cost -- such as $600.00 -- or as close as possible to this figure.....

The TOTAL COST is $3,600.00.

And the end result is quite different! 

Looking at the same scenerio where AMD, GME, HBI and HPQ are up 100% -- the profit is $2,369.00.

DKS and LB are losses -- costing $1,231.00.

Your profit is now $1,138.00 (AMD, GME, HBI and HPQ minus DKS and LB). This is a big difference to the original scenario.

Besides research, DISCIPLINE and PATIENCE is the key to profiting (without these 90% of options traders fail).

As to setting a limit for each trade, if you decide to adopt this strategy, it is entirely up to you -- I used $600.00 as an example only. But if you do so, keep at this for a given time and then re-assess in a couple of months.

I hope this idea can help get you back on the road to financial recovery or continued prosperity! 

DECISION TIME CALLS!

“Greed Can Be The Undoing Of A Good Profit”

Best of Trading,
Ian Harvey
Director of Stock Options Made Easy

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

Back to Strategies in Trading from Trading Capital

Back to Stock Options Made Easy Home Page