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Monday, December 10, 2007

Money Management Strategy for $500 Accounts: optionsXpress Futures Options Account

We stated we were going to talk about the money management principles, and how they apply to the Futures options account that we have setup, the optionsXpress account; in order to answer the question: When do we start trading?

Currently, that account balance reads $470.00 at the end of November (see, this associated pic for that bit of data, and this other pic to see that as far as the Sharebuilder sub-account) with another $100.00 going in this month to the optionsXpress sub-account that I have setup. So we'll be looking at an account balance in the optionsXpress account of $570.00 in December.

Our average options purchase, when we start trading is going to cost us about $173.00. Some will cost more, some less. But that's about the average. We will cut our losses if the option ever losses about 60 - 65 % of it's value. Plus, you have to figure commissions are going to cost us around $13.00 a trade. So we're going to be risking about $120.00 on each trade. Our minimum reward that we will be striving for, will be about 2.3 times what we are risking. So when we sell the option, we'll be looking to sell it for a minimum of $276.00.

Here's where some of the money management principles we talked about earlier come into play. First, the risk is greater with the optionsXpress account. Therefore, we have to more stringently apply those money management principles when we trade it. And what's one of the first rules of risk analysis? Try to never risk more than 5% of your account size on any one trade. So therefore, to be adequately funded trading one option at a time, we need to have an account balance of how much to trade a $173.00 option? Close to $2000.00. If our accuracy is high enough, we might be able to get away with an account balance of $800.00 or so. How? Well, we can't trade $173.00 options. Every once in a while, an option will come along that fits all my parameters, and may only cost us about $110.00. If our accuracy rate is high enough, and drawdown is low enough we might, possibly be able to trade the account at that level.

So our first goal in adding funds to these accounts, is to get the optionsXpress balance to $800.00 for options $110.00 and less, if the option fits the correct parameters. This is a topic we will get into later. At the end of this month, we'll have a balance of $570.00. So only $230.00 more to go, or a little over two months. But there is a lot of education we can cram in two months, so that we are prepared to start trading the optionsXpress account.

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