Ken Trester

Trade Options with 'Fun' Money

by Ken Trester   07/18/08

One of the classic statements in the options game is, "Don't play with money you cannot afford to lose." But I'd be willing to wager that many folks hear that caution and let it go in one ear and out the other. It's like telling a teenager that they can't have a party while their parents escape for the weekend -- they might conspire to throw an unchaperoned bash that will be the talk of the town!

Leave the impulsiveness to the teenagers and don't be in a rush to start putting options trades on the table willy-nilly just because you can. Remember that buying options -- especially calls, which serve as a proxy for owning the stock -- requires just as much care and forethought as buying stocks. Just because you're spending less, doesn't mean that the investment is any less important.

In fact, if you buy options and the stock doesn't make the expected move by the time the options' expiration date rolls around, the small investment that didn't pay off will suddenly feel like a BIG deal!

Money you supposedly "can" afford to lose is still money that you value. So, you really should be playing with money that you are willing to light up with a match -- money that can be left behind like plastic poker chips on a table if the game doesn't go your way.

Think about it: Gambling establishments make you use chips and tokens when you play games of chance so that you won't value them as highly as good, old-fashioned bills and coins. Therefore, when you're playing with "Monopoly money," you're less afraid to play more chips.

So, to get out of the "Monopoly mindset" when you buy options, you should set aside some fun money every year and kiss it goodbye. View it as though you're establishing a vacation fund -- trading options is an expenditure you want to make and, just like a vacation, it's wise and even necessary to budget it into your schedule every year.