Should you start Options Buying with a small capital?

Short Answer

Options Buying requires a lot of skills and effort from the trader. It is not easy to generate profits using Option buying. Many factors work against Options Buying. Let's look at some of the factors and find out if it's a good idea to start Options Buying with small capital.

Detailed Answer

Should you buy Options with a Small capital?

Option buying in itself is riskier when compared to Options Selling as many factors work against the buyer of an option. Time Decay is the main enemy of an option buyer. On top of that, the Delta of Options is very low for OTM (Out of The Money) Options.

Therefore in short Option buying is not an appropriate idea with small capital. Let’s look at some reasons why it’s not good to start Options Buying with small capital.

1. Low Delta in OTM Options

Delta is the metric that denotes the increase or decrease in the premiums of options with respect to the underlying. The value of Delta ranges from ‘0 to 1’. This means if the Delta of an option is 0.5 and the underlying moves by 100 points. The option premium will increase by 100 x 0.5 = 50 points. When you buy an OTM (Out of The Money) option the Delta is quite low at (0.1 to 0.3). With this even if your view on the underlying is right there with not be much change in the premiums until the stock/index makes a significant move of more than 1-2%.

2. Time Decay

Traders with limited capital tend to buy OTM options where the intrinsic value of the Option is 0. The premium is for the time value of the option. Time value keeps on reducing with every passing hour. This by default eats into your profits until the underlying gives a massive move in your favor. Therefore, for option buyers, it is recommended to buy an ITM (In The Money) option where there is some intrinsic value. This will prevent the option to expire at 0.

3. Requires Perfect Entry & Exit

In option Buying, you need to plan your entry and exits very precisely. Not only your view of the underlying has to be right, but also the timing of the trade. Options buyers require many skills to become profitable. If you hold on to a losing trade for too long, your Option premium will go down to 0. By this, it is clear that option buying requires a lot of Technical and Fundamental know-how. New traders often lose money due lack of skill and knowledge. Therefore, it is better to gain knowledge and then start to trade in the markets with a sizable capital.


Due to the above-listed reasons Options buying with a small capital is not suggested. Buying far OTM options is the most grievous mistake that retail traders make. The chances of an OTM option turning into ITM are extremely minimal. As is it the chances of winning in options buying is very small. On top of that buying OTM options reduces your chances even sleeker. Hence if you have to buy options, it's better to buy (In The Money) Options where it has an intrinsic value. Instead of using naked option positions, you can create multi-leg option strategies like Spreads, Straddles, and Strangles. Following these strategies will increase your probability of profits.

Tagged With: Stock MarketOption BuyingTheta DecayDeltaOption Premium
Categories: Option Trading
Ask your query and our expert community would be happy to help
Discussion (0)
Related FAQs

What is Open Interest in Options Trading in Stock markets? Examples

Open Interest is a parameter used by technical analysts and options traders to judge the mood of the market. Open Interest is the total number of outstanding option contracts in a particular strike price of an underlying asset. The OI is an important factor as it defines liquidity and the total number of contracts that are traded at a particular point in time.

What is Delta Gamma Theta Vega in options?

Option Greeks are the financial indicators. Delta, Gamma, Theta, Vega are the option Greeks and deals with different variables such as price, maturity, volatility.

Can I buy stock when the market is closed?

No, it is not possible to purchase any stock when the market is close. Although, you can still place an order even when the market is close.

Can stocks be bought after market is shut down for next day?

Yes, stocks can be purchased after the stock market is closed. You can do so by placing an AMO which would be executed the next day once the stock market opens.

Can I buy Canadian stocks on Charles Schwab?

Charles Schwab is a U.S.-based broker which offers many brokerage accounts to its users. You can buy Canadian stocks on the platform although Canadian users cannot open an account with it as it offers its services exclusively in the U.S. Existing account holders can purchase Canadian stocks during the market hours using the broker's platform.

Which strategies should a Options Buyer use to make money?

Option Buying is more common when compared to options selling. This is because option buying requires less capital and the maximum profit is uncapped. This lures many small retail traders who ultimately lose money when it comes to options buying for various reasons. Follow these strategies to increase your chances of generating profits.

How can I buy U.S stocks in Canada?

Canadian citizens can easily purchase U.S stocks. Many online stock brokers provide the facility to invest in US stocks. Questrade and Interactive brokers are some of the brokers who allow foreign investing. Apart from this, there are some other ways to directly as well as indirectly invest in US stocks. One of the non-traditional methods includes the TFSA (Tax-Free Savings Account) with which you can buy up to $6,000 worth of stocks per year.

How can I buy a stock without a broker in Canada?

Canadian citizens above the age of 18 can open a TFSA (Tax-Free Savings Account) in which you can contribute up to $6000 annually. This can be in the form of stocks or other securities. You can also use an RRSP (Registered Retirement Savings Plan) where you can contribute a higher sum which will be taxable, unlike the TFSA which is completely exempt from taxes.

Is it a good time to invest in stocks? Bullish Stock Market

There are several questions that one can ask your advisor. These questions include whether its good time to enter or exit the market? Should in exit from debt and move to FD? do I continue my SIP portfolio? and other such questions.

Which is the best time frame for Options Trading?

Options Trading is a risky business and options traders have to look at various parameters before taking a trade. Choosing a time frame is one of the factors in options traders. Both option Buyer and Sellers use different time frames to trade. Let's see which time frame is most useful for options buying as well as selling.