How Much Money Do You Need to Trade Options? Worked Cases

Buy 1 call, limit $2.50. The ticket shows a $250 debit and no collateral. For a single long option, that really is the cost. Sell a put or a spread and the ticket starts asking for collateral, and the amount it asks for is set by the worst case, which is the right number to size by in the first place.

Case 1: Buying a call

A long option costs its premium. Options are quoted per share and a standard contract covers 100 shares.

That $250 is the whole commitment. It is also the whole risk, and the option can lose it on a stock that goes nowhere, because time decay takes value out of the premium every day the move doesn’t come. Four of those calls in a $5,000 account put $1,000, or 20% of the account, at risk.

Case 2: Selling a cash-secured put

A sold put can be assigned. Then you buy 100 shares at the strike, and the broker holds cash to cover that.

The risk is similar to owning 100 shares bought at $39. Zero is the extreme case. A fall to $30 leaves you owning shares worth $3,000 for a net cost of $3,900. Cash-secured puts are the first leg of the wheel strategy; once shares are assigned, the covered call calculator handles the second.

Case 3: A put credit spread

A spread caps the loss. Sell a put and buy a lower-strike put in the same expiration, and the most you can lose is the distance between the strikes minus the credit you took in.

The broker holds $350. That is far less capital than the cash-secured put, and the loss is capped, though the spread’s maximum gain is also capped at the $150 credit, so each losing trade costs more than two winning trades earn.

Which case fits a small account?

Lay them side by side. The call needs $250 and can lose all of it. The cash-secured put ties up $4,000 and carries a worst case of $3,900. The spread ties up $350 and can lose all $350.

In a $5,000 account the cash-secured put uses most of the capital on one position. That leaves little room for anything else, and a single assignment turns the account into one stock. The call and the spread both fit, though each can lose its full amount in a week. A small account is usually better served by defined-risk trades sized so that several losers in a row still leave most of the capital intact, which in practice means one contract at a time and a hard limit on how many are open at once.

What does your broker require?

Brokers must approve you for options before you trade them, usually in levels. Low levels allow buying calls and puts and selling covered calls. Higher levels add cash-secured puts, spreads and, at the top, naked selling. Each level can carry its own minimum balance, and margin requirements for spreads and naked options vary by broker, so the same spread can tie up different amounts at two firms.

How should you size an options trade?

Size by the maximum loss. The premium you pay or collect is a poor guide: a $1.50 credit sounds small, and the loss behind it is $350, while a $2.50 debit is the loss itself.

Take the 1% rule from stock trading. In a hypothetical $20,000 account, 1% is $200. That covers one of the calls from Case 1 only if you exit at a planned stop on the premium, and it doesn’t cover even one of the spreads from Case 3 if held to expiration. A cash-secured put on a $40 stock is a $3,900 risk in the worst case, which is why traders who sell puts treat them as a decision to own the shares and size them as they would a stock purchase, with a stop or a plan for what happens after assignment.

Delta estimates how far the option moves for each $1 in the stock; see delta. The options topic page collects the related strategies.