Effect of Fund Size on Options Trading

What is the effect of how much money you are trading with affect your options trading?

Options is a Rich Man Game

A lot of beginners to options trading think they will get the same result on a big fund as they will get on a small fund and vice versa. That is far from the truth. I hate to say it in this way but too many fake options gurus in the world has been promoting options trading falsely as a "get rich quick scheme" when the true magic of options is realised only with significant fund sizes, which is why I like to call it a "Rich Man Game" lately. In fact, the bigger your fund size, the better certain very advanced options strategies work and the safer and more consistent your options trading result becomes! On the contrary, the less amount of money you have, the more speculative options trading tends to become and the less consistent your results become, in fact, you are more likely to lose it all more than anything else. Why is that so?

The Lesser The Fund, The Riskier The Options Strategies

One inescapable truth in options trading is that the lesser money you have, the simpler and riskier the options strategies that are available to you. As I covered in the article "THE SIMPLER THE OPTIONS STRATEGY, THE HARDER IT IS TO WIN" The lesser money you have, the more speculative your options strategy tends to become and therefore the lower the chances of winning consistently in the long term. Why? Because it takes an extraordinary level of market analysis skill to keep staying on the correct side of a speculative trade. In fact, even the simplest of options strategies, the "Long Call", requires a huge fund size in order to ensure long term profitability. Only with a huge enough fund size can you employ proper money management and risk management strategies to the simple long call, thereby committing only small fractions of the overall fund at each time. The less money you have, consequently the more percentage of your fund needs to go into the simple long call and it turns more and more speculative as the risk of losing an irrecoverable portion or the whole fund, increases.

The Lesser The Fund, The Lesser Your Loss Buffer

Another inescapable truth in options trading is this; First Trade Loss. Nothing is more destructive than losing the very first trade of a new account as it takes more than twice the wins just to get back up and sometimes, you simply could never get back up. This is an ever existing threat because no options strategies are 100% win. The smaller the fund size, the more that first initial loss is going to eat into your future trades. In fact, if your fund size is extremely small, you could loss half or the whole account on the very first loss, making it simply impossible to get back up again. The bigger the fund size, the better your loss buffer is and the smaller the impact of losses, especially the first trade loss. The smaller the impact of losses, the easier it is to get back up into profitability again and therefore the higher your chances are of making a consistent long term profit.

The Bigger The Fund, The Better Some Strategies Work

Even when you have a big enough fund to trade with extremely complex options strategies, typically, the bigger the fund size, the better those complex options strategies tend to work. This is because all complex options strategies work based upon balancing and rebalancing the 5 greeks of options. In order to keep the greeks of your options position within certain parameters, typically the more money you have, the more precisely you can get to the ideal greeks parameter or composition. Conversely, the smaller the fund size, the less able you will be at meeting the exact ideal greeks profile and therefore the strategy would not work in the most optimized way. This is why I mentioned in my article on "What does It Take To Be a Great Options Trader", I mentioned that having a significantly big fund size is one of the 7 important keys.

How Fund Size Affects Options Trading - Conclusion

As you can see from the reasons above, the smaller your fund size is, the riskier and more dangerous options trading tends to become and the further away from being able to trade options for a living becomes. As such, instead of thinking of using options to "get rich quick", it is better and more productive to think of using options to "make yourself richer". Focus on making a big enough fund size through other means like having a good job or real estates investment and then using options trading to release residual income from that money or to grow that money faster than regular mutual funds or bank accounts regardless of the market condition do is how the real magic of options trading is truly expressed.

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