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Options Investing Strategies
(Money Management Strategies)

Depending on their trading styles and risk tolerance, traders can select among a number of money management approaches for options trading; these will dictate how much to invest (and reinvest) in a given trade. Below, we outline three such trading strategies and show their benefits as well as potential drawbacks.

Strategy 1: Reinvest both the principal and accrued profits

One of the most popular trading strategies involves the reinvestment of both the principal and profits after each (positive) trade. For instance, if a trader allocates $2,000 to a first trade and then makes a 50% profit, he/she would be able to invest $3,000 in the following trade (the principal of $2,000 plus the $1,000 profit). By investing in this fashion, a trader will benefit from the power of compounding; however, trading options this way is aggressive and very risky - a trader could quickly wipe out an entire portfolio. It is not recommend approach for options trading!

Strategy 2: Invest a fixed percentage of the portfolio

Another popular trading strategy is to allocate a fixed percentage of the portfolio to each trade. For instance, a trader may decide to invest 20% of a portfolio in each trade. Assuming a $10,000 portfolio, the trader would thus invest $2,000 per trade. Should a trade result in a 50% profit, the trader would then have $11,000. He or she could then allocate $2,200 (20% of $11,000) for the next trade. This approach to options trading is considered conservative.

Strategy 3: Invest a fixed amount

A third way to allocate funds is to invest a fixed amount per trade. For instance, a trader with a $10,000 portfolio could set aside $2,000 for each options trade. Even if a trade resulted in a 50% profit, the trader would still only invest $2,000 in the next trade. This trading strategy is less profitable than strategy 2 discussed above; however, it allows a trader to recover more quickly from (a) losing trade(s). In order to increase their profit potential in good times, traders sometimes combine this approach with a higher investment once a certain portfolio size has been reached. For instance, a trader may decide to invest $3,000 per trade once his or her portfolio has grown to $15,000.

The comparison table below shows how a portfolio would fare using the three trading strategies discussed above. The following assumptions are made:

  • The initial portfolio value is $10,000;
  • Three options trades are made: The first leads to a loss of 70%; the second and third each produce a gain of 50%.
  Trading Strategy #1
(reinvest everything)
into a trade
from a trade
Total Profit
Initial Portfolio Value $10,000
1st Trade: -70% $10,000 -$7,000 -$7,000
2nd Trade: +50% $3,000 +$1,500 -$5,500
3rd Trade: +50% $4,500 +$2,250 -$3,250
Portfolio at the end

$6,750 (33% loss)

  A very aggressive and highly risky trading strategy.

The trader risks losing the entire options portfolio with one bad trade, making it very difficult to recover.

  Not recommended for options trading


  Trading Strategy #2
(reinvest 20% of the portfolio)
into a trade
 from a trade
Total profit
Initial Portfolio Value $10,000
1st Trade: -70% $2,000 -$1,400 -$1,400
2nd Trade: +50% $1,720 +$860 -$540
3rd Trade: +50% $1,892 +$946 +$406
Portfolio at the end

$10,406 (4% profit)

  A conservative trading strategy.

While it may also be difficult to recover from losing trades, a recovery is often much faster than in strategy #1. This strategy has some compounding effects. The risk of losing the entire options portfolio is relatively small.

  Recommended for options trading.


  Trading Strategy #3
(invest $2,000 per trade)
into  a trade
from a trade
Total profit
Initial Portfolio Value $10,000
1st Trade: -70% $2,000 -$1,400 -$1,400
2nd Trade: +50% $2,000 +$1,000 -$400
3rd Trade: +50% $2,000 +$1,000 +$600
Portfolio at the end

$10,600 (6% profit)

  A conservative trading strategy.

Recovering from losing trades is comparatively easy. This trading strategy has no compounding effects. If several significant losses in a row are sustained, the strategy could still result in a total loss of one's options portfolio.

  Recommended for options trading.



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The Information on the Site is provided for information purposes only. The Information is not intended to be and does not constitute financial advice or any other advice. The trading of stocks, futures, commodities, index futures or any other securities has potential rewards, and it also has potential risks involved. Trading may not be suitable for all users of this Website. Past performance is not necessarily an indication of future performance. You absolutely must make your own decisions before acting on any information obtained from this Website.

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