Grow a Small Options Account Consistently and Confidently l Options Trading

options trading is already complex but when you're working with a small account it only adds to those complexities so in today's video i want to show you how i would navigate the options market if i was working with a small trading account now let's first address why is it so difficult to trade options when you have a small account it really comes down to basic math because when you're working with a small trading account each trade that you're making is going to be risking a relatively large percentage of the total account value let's say you have a trading account that's 2500 in value and you risk 500 on a single trade you're going to find that you're going to be risking roughly 20 of your total account on a single trade so if you lose three or four trades in a row you've effectively wiped out the vast majority of the capital in your account and it leaves you with almost nothing left to continue trading and in addition to this when you're looking for opportunities that risk a relatively small percentage of your portfolio it's becoming increasingly difficult in this environment to find stocks that are relatively reasonably priced many of the stocks that you like like facebook or apple and amazon trade at multiples of 200 300 unfortunately with many investors that i see working with trading accounts under five thousand dollars this is exactly why they resort to using strategies like yellowing where they buy really far out of the money call options hoping to turn a small trading account into a relatively large trading account in a very short amount of time unfortunately this is a terrible long term strategy it might work out for you a couple of times but the vast majority of times those out of the money call options will expire worthless and you will lose 100 percent of the premium that you pay so in this video today what i want to present to you is an alternative method as to how you can grow a small trading account in a more sustainable way to help you start off there are two things that you need to do to set up a trading account first one you need to set up a brokerage account with an options trading privilege that allows you to trade spreads at least a level three clearance on options the second is setting up a margin account which requires you to have at least two thousand dollars in capital for the trading account if you're not sure how to do this i'll include some links below to brokerage firms that will help you set up these trading accounts now that you've set up your brokerage account let's talk about the actual strategy you're going to need in order to grow your small options account when it comes to options there are literally hundreds of strategies that you can choose from but when you're working with a small trading account i recommend that you stick to one single strategy on one type of product in order to help you slowly grow your trading account in a sustainable way and that strategy is to sell credit spreads on specifically index options such as on the nasdaq 100 index now the reason i'm telling you to stick to one strategy on one type of product is because learning how to trade options may sometimes feel like you're drinking from a fire hose so the goal when you're trying to start out is to minimize the number of variables that you need to learn so when you're trading credit spreads what you're controlling is risk and reward you know exactly how much you can potentially win or lose and also by trading index options you're reducing your total amount of risk that you're taking on these types of products and i'll explain what those mean in a second so let's talk about the three key reasons why i suggest for beginners to start with a credit spread first it's because it's a limited risk strategy it's very important for beginners to know exactly how much you're making or losing so that you understand your risk and rewards the second reason is because it's a forgiving strategy you can have the directional view right and be profitable if the stock doesn't move very much you'll still be profitable only if you absolutely get the directional view wrong do you have a loss on the trade and third because it's a very forgiving strategy it's a strategy that by default you can expect to be profitable more than 50 percent of your trades i think it's important for traders when they're starting out to have trades where they're winning more than 50 percent of the time to build your confidence and your strategy and your confidence in the markets now there are four reasons why i suggest investors who are selling credit spreads on a small account to do it on index options specifically first it comes down to liquidity index options are some of the most liquid products you can trade when you're starting out with options you don't want to add liquidity as another thing that you really have to be concerned about the ability to get in and out of a trade whenever you need very quickly is something that you want to be able to have access to when you're first starting out the second reason is european cash settlement this is unique just to index options the cash settlement process really allows investors to remove two immediate risks that you have when you're trading credit spreads and that's assignment risk and exercise risk when you're trading european cash settled index options you remove these risks entirely when you start trading stocks and etf options you can learn more about this and learn more of how to manage those risks but when you're starting out remove them entirely by trading index options such as on the nasdaq 100 index thirdly you have a tax benefit when you trade an index option they're taxed at sixty percent long-term capital gains and forty percent short-term capital gains that's going to provide you with the tax advantage when you're trading index options versus stock and etf options and lastly no earning surprises when you're trading index options index diversify away earnings risk so this is something you don't have to worry about when you're trading credit spreads on an index option eliminating the earnings risk is just one more step in making your learning process a little smoother for a small trading account now the only challenge with index options is that typically they are very very large size which means that for many retail investors especially ones starting out with a small trading account they are simply too large for retail traders however with the launch of the new xmd index option product this is specifically suited for this very purpose the new micro xmd product is 1 100th of the full value nasdaq 100 index and currently has a notional value of only about 14 000 per contract versus 1.4 million dollars for the full value index so i think the best way to learn this is to go through a real trading example let's first take a look at xnd which is currently trading around 140 the trade i'm going to show you is a credit spread and i'm going to put a link below for you to learn more specifically about the benefits and advantages of trading credit spreads the trade example i'm going to show you is based on xmd trading currently at around 140 dollars what we're gonna do is we're gonna sell a 45 day at the money put option so around a hundred and forty dollar strike price and then buy back a forty five day hundred and thirty five dollar put option an out of the money put option and let's say on this particular trade the net credit that we receive is 200 for the trade now with a credit spread like this where the distance between the two strikes are five dollars apart and we're collecting two dollars of that five dollars that means we're risking a total of three dollars per share so on this entire trade your maximum gain is two hundred dollars that's the most you can gain on this trade your maximum risk is three hundred dollars that's the most you can lose so let's take a look at the potential outcomes of x and d and when you'll see a gain and when you'll see a loss so for this we're going to explore three potential outcomes where xmd rallies above 140 dollars you're gonna gain the two hundred dollars and if xmd doesn't move anywhere stays around this one hundred and forty dollars at expiration you're also going to gain those two hundred dollars only when we get the directional view wrong and the stock declines substantially below that 135 strike price that we've bought do you receive a maximum loss of 300 so this is a strategy that's suitable when you have a bullish view on xmd as you can see from these examples it's a forgiving strategy and if you're new to credit spreads i've linked a deeper dive below so that you can learn more about trading credit spreads and the best practices for them and most importantly by starting out with credit spreads on an index option such as the nasdaq 100 index what you're going to be able to do is remove a lot of the complexities and risks that comes with trading options in a way that's more defined and allows you to build confidence in your strategies in a more consistent manner i hope that this video was useful in helping you get started with a small trading account and i'd love to hear from you so please leave some comments below and let me know what your experience has been in starting options trading with the small account and if you found this video useful don't forget to hit subscribe and remember the notification bell so that we can send you an alert the next time we upload a new video on this series thank you and have a great trading day [Music] oh [Music] you

Channel: OptionsPlay

Views: 26,581

Rating: 4.9581881 out of 5

Keywords: options trading, options education, OptionsPlay, Tony Zhang, technical analysis, trading, trading education, CNBC, nasdaq-100, NDX, NQX, XND, index options, options trading for beginners, options trading explained, options trading 101, small account options trading, grow a small options, how to grow a small options account, options trading with a small account, keys to trading confidence, steps to grow a small options account, small account education, learn to grow a small account

Id: GaSmSiZHYIw

Length: 10min 43sec (643 seconds)

Published: Thu Jun 10 2021