How Much Should You Invest

In order to make a decent amount of income from your options trades your need to buy between 10-20 options contracts.  I suggest buying 10-20 contracts of an option that is 1-3 legs out of the money.  The minimum investment is usually around $200 - $500.  The reason I make this suggestion is because during any one day a stock’s price will only move 1 percent meaning the options will not move as much.  In order to make money on a daily or weekly basis you need to buy larger amounts of options so you can make money on the small moves.  

Just think about Walmart versus the local convenience store.  Walmart can make a lower profit margin on any one item versus the local store because of volume.  Walmart has numerous stores and if it sells any item with just a $1 profit margin it will still make money.  Whereas the local store will make a $1 profit, Walmart has 7,437 stores.  If it sells one of the same item at each store it will make $7,437.

Let’s look at Walmart’s stock for example.  If you bought 5 contracts of the August 18 $70 call option valued at $0.81 yesterday, because the option value is now $0.86, you would be up $24 ($9 minus the commissions) by the end of today versus buying only one call option.  You would need for the price to go to $0.92 (because of commissions) before you could see a profit from just having the one contract.

If we take AT&T from the previous article example you could buy 3 shares of the August 18 call option strike price of $37 at $0.12 for a total of $42 ($36 + $6 commission).  You will need the option price to go up four points to $0.16 in order to break even (3 contracts * $16 = $48 minus the commission of $6 = $42).  On the other hand if you buy 15 shares of the same option for a total of $195 ($180 + $15 commission) you need the option price to go up to only go up two points to $0.14 to break even (15 contracts * $14 = $210 minus $15 commission = $195).

Now of course this is a larger risk of $195 versus $42, but if you’ve done your due diligence and vetted the stock via technical analysis, market conditions, recent and upcoming news, and following the trend, you should come out on top.