The Truth About Buying Power

We all know about the need for buying power when we make our initial trades during the month.  And we all love that our thinkorswim software recognizes that you can’t lose money on both the puts and the calls when establishing an iron condor, so in essence our second trade of the month is essentially free.  The question there for needs to be asked, how my money or buying power should I hold in reserve?

Your money rules not withstanding, how much should you hold back and why? Hopefully these are lessons better learned while paper trading, but a few of us have learned the valuable lesson of holding some percentage of buying power in reserve. There will at some point I suspect be the need to vertical roll as I have personally learned this month. Luckily I knew enough to know when to vertical roll (click here if you missed that post) and I made money on my vertical roll, but others waited too long and had to pay money to roll.   There may come a time when you just decide to take your losses and move on and it could cost you money to close out a position.  There is nothing wrong or bad about this, we use stop losses all the time, they are a very smart part of any option trading strategy.  Better to take some losses and live to trade another day than to wait until you are under the bus.   You may want to really take some risk and implement a two stage butterfly up like strategy, if you’ve got the guts for it.   That will cost buying power.

So how much is enough?  I’ve heard the suggestion of 10% as a good number.  I, being the conservative one keep 20% buying power in reserve.  Once again this plays into your money rules and your risk tolerance.  At the very least the amount of buying power you hold in reserve needs to be a conscience decision, not a random one.

Happy trading!!