Undercapitalization

quantdropout · Dec 2, 2005

I am attempting to advise a new trader that has the following capital and annual goals, that wants to trade at the money equity options (call options and bull spreads).

Capital: $12,500
Return goal: 24% or $3,000 annually

Following sound money management rules (great threads elsewhere on ET) - is this enough capital?

I would appreciate any insights on this situation.

Thank you very much.

TruthTeller · Dec 2, 2005

Quote from quantdropout:

I am attempting to advise a new trader that has the following capital and annual goals, that wants to trade at the money equity options (call options and bull spreads).

Capital: $12,500
Return goal: 24% or $3,000 annually

Following sound money management rules (great threads elsewhere on ET) - is this enough capital?

I would appreciate any insights on this situation.

Thank you very much.

A new trader has enough hurdles in front of him. Options, of any kind, are the last thing he should be considering, as the house has a much greater edge. Only when he can successfully trade underlying stock should he consider options.

quantdropout · Dec 2, 2005

Quote from TruthTeller:

A new trader has enough hurdles in front of him. Options, of any kind, are the last thing he should be considering, as the house has a much greater edge. Only when he can successfully trade underlying stock should he consider options.

Thank you TruthTeller. I agree with your assessment of additioanal risk.

With that being said, I would love an opinion regarding the capital adequacy or inadequacy as it may be (assume for the moment that he can successfully trade the underlying).

range · Dec 2, 2005

Trading less that $25K, a trader will not meet the threshold for being a Pattern Day Trader. Consequently, the trader will not be severly limitied on how often he/she can buy and sell the same stock. If that does not matter (e.g., if the trader is only focusing on options), then that's OK.

TRADERguy · Dec 2, 2005

Twenty four percent is easily achievable by an active trader who trades well. It's a harder goal but still somewhat reasonable for someone who is trading part time looking at the market only after hours for an hour or two a day. Any expensive monthly subscriptions will be a major roadblock for someone trading this size account: if the trading style requires costly newswire services or charting packages it will be a problem.

Cheers,

TRADERguy

murray t turtle · Dec 2, 2005

Quote from quantdropout:

I am attempting to advise a new trader that has the following capital and annual goals, that wants to trade at the money equity options (call options and bull spreads).

Capital: $12,500
Return goal: 24% or $3,000 annually

Following sound money management rules (great threads elsewhere on ET) - is this enough capital?

I would appreciate any insights on this situation.

Thank you very much.

===========

Quantdropout

Might be , that is after he turns profitable;
& may do better with ITM options/underlying stocks,
& thats a strike against him ''calls ''only apparently

And if he hasnt turned a profit, 1 contract, or 100 shares ;
probably would not be wise to start with that large a size.

And very well may take more capital, unless he /she is unusually disciplined/ bright/disciplined.

Could pull it off however ;
college dropouts, for example are frequently high achievers,
may or may not happen in a year.

:

uninvited_guest · Dec 2, 2005

Also consider Forex.

200:1 leverage packs more punch than buying options, but can be more risky.

Enfinity · Dec 3, 2005

If he is going to do it, he should start with $2k...with the leverage that options provide that's all one would need to begin trading with. The slippage is a factor that should be weighed though. To understand the option you need to understand the equity beneath it...at least paper trade the stock(s) before looking at trading the actual options.

Quote from quantdropout:

I am attempting to advise a new trader that has the following capital and annual goals, that wants to trade at the money equity options (call options and bull spreads).

Capital: $12,500
Return goal: 24% or $3,000 annually

Following sound money management rules (great threads elsewhere on ET) - is this enough capital?

I would appreciate any insights on this situation.

Thank you very much.

uninvited_guest · Dec 3, 2005

Quote from Enfinity:

To understand the option you need to understand the equity beneath it...at least paper trade the stock(s) before looking at trading the actual options.

Nope........paper trade the options. Stocks don't have "time decay", "implied voltility", "expiration dates".

Enfinity · Dec 3, 2005

The options are derivatives of the underlying stock..paper both...but whatever he does I would say $2k is enough to get going in options when someone knows what they are doing and is only looking for $3000/yr out of the market...understanding the greeks is not necessary to achieve success.

I assume someone would understand the concept of expiration dates before attempting to place any money in an option trade.

Whatever you do, understand the stock and then evaluate the option movements in RELATION to the stock movements.

Quote from uninvited_guest:

Nope........paper trade the options. Stocks don't have "time decay", "implied voltility", "expiration dates".