How to Trade Strangles In A Smaller Account

all right we got an interesting tasty bite segment tasty bites is accounts that are we kind of coined this phrase counts 2,500 to 25,000 and why they tasty bite accounts because they are inside of the pattern day trading rules which means that you can only do a certain number of you can only do 3 kind of round trip day trades per week and it count sizes under 25,000 that's not that's a that's a FINRA rule not a broker so um this is for people that you know small accounts want to trade just can't trade in out of stuff the same limited by some of the strategies that they implemented by the capital you can do so we challenged the guys and said hey how far on the limb can you go listen right now volatility is so cheap it's hard to find it in do sure I mean we sold a put spread yesterday in blackberry I'm sorry so in a deeply anyway BlackBerry's now 9 and on the 9th straight let's talk about how reaching is that but let's see we got here so tasty bite strangles now the reason we put this up is because a lot of people with small accounts email us they go I can't do this stuff you guys are doing so how do I do it with a much smaller account let's take a look um ok so we are aware that limited capital may restrict the strategies that we do particularly naked options however there's still some opportunity to sell strangles and low price underlyings with lower market requirements in fact we thought we felt so strongly about this that we'll take a little look here now somebody said to me they wrote me an email this morning they said hey you know what and and again the funniest the craziest thing about we do is is the people that watch the show I mean some of the you know some of the kids are we're talking about you know Yale Harvard Berkeley Stanford MIT you know we got just you know an amazing audience but and they thinking through this stuff and some of the younger people watch the show like ok I know we can do it like I know what what Craig was doing the other day when we selling oil options but isn't the risk ginormous like you know I don't want to go out of business sure listen you're 22 years old you know Craig and I have to put this in perspective i said to craig today how much mind you make he's the rising star though he's a rising star today he's a small tasty bite-sized accountant he first started 7,500 he's up to 35,000 now so now he has Marg and privileges yes yeah no he's over the tasty bite-sized right over 25k now remember you're he's in his mid 30s most mostly we're talking about like um earlier than that mid 20s whatever it is he made a hundred percent a year for the last two years now as wonderful as that is you have to take risk to make a hundred percent like like I just want people understand this you're not used it to you don't you don't you can't do onion can't do to find risk trades and hit it out of the park to make a one hundred percent return on capital it's very difficult so I just I want people to understand that the reason we talk about this is not because we want you to screw out there and sell make adoptions and plumb apply this the reason we talk about this is if your objective you're young you want to be aggressive okay or at least I think you do you want to give yourself in a position I mean here you want to take no risk at all I will pay you seven tenths of one percent on your money so at the end of the year for every thousand dollars that you have I'm gonna pay you seventy dollars now it takes a long time to get back up to a thousand dollars yes of course that's it right that's it no I'm sorry for every thousand dollars I'm gonna bet my bad for every thousand dollars okay one percent is one percent is ten dollars I'm gonna pay you 7/10 one percent seven dollars on your thousand four risk free money now how bad do you want risk free money where you get one tenth of less than I mean seven tenths of one percent so you're gonna make seven dollars a year on a thousand dollars let's see a five thousand dollar count you make thirty five dollars a year that's what you get for risk free money mm-hmm so let's rule that out right away and say hey you know what I'm 25 years old with that I'm gonna go for it I'm talking about like I'm speaking for my daughter for example and and let's just say she said to me Dad go for I want to go for it sure I want to make a hundred percent you don't want to do stupid things but if I can have a 95 percent chance of success and I can make a hundred percent a year I want to go for it you give me a 95% chance success and an opportunity to make 100 percent a year I want to go for it that's all this is hmm this is not about anything else it's not about it's not about hate not recognizing that we have risk it's saying hey I understand that I have unlimited risk but I don't want to go for no risk and seven dollars a year or thirty five dollars on a five thousand dollar account I want to go for a hundred percent probability success I'm sorry 100 percent return on capital 95% probability success to get five thousand dollars a year I'll take my shot okay fair enough that's it that's what it comes down to it that's right that's all it is so don't think what I'm can you do it the best for me the best time to do it when you're young you don't have those kind of responsibilities of somebody else you might have children marriage what other kids mean where else where else can a person with $5,000 find an opportunity at a 95% probability success to take theoretical unlimited risk and have the massive counterparty risk to somebody else sure nowhere nowhere right so before you go out and say oh this is really dumb you can get yourself wiped out we get that but the flip side of it is you get a 95 percent chance of success much to double to double your money and you know what maybe that's worth it that's all I'm saying we can't go beyond that but people have to understand this we're not sitting here saying we are definitely not saying this is for everybody but we're saying hey you know what listen I'm gonna tell you this I'm nowhere maybe I'm nowhere in life I don't even know maybe or not who knows whatever level of success we've achieved but most but most of the people don't think we haven't rolled the dice or roll the dice when I was 22 years old I roll the dice when we're 40 years old we rolled the dice this time with tastytrade sure when I'm you know in my mid 50s and early 60s and 50s and I'm rolling the dice sure okay again and you know yeah I'm putting everything online like we do every single time it doesn't I don't think about it right so don't for one second think like hey you don't nobody does this it's not true once you understand that risk it's either do or don't do that's right - that's right so it's not the first time none of that stuff let's let's go next slide - to show this we conducted a study selling strangles on lower priced products whose margins would still be possible in a tasty bite size account the other day you saw this happen with Craig when he was on the show let me also say one thing sometimes it's hard to get permission to sell naked options which required tier 3 tier 2 anybody that's a tastytrade listener if you you almost automatically get tier 2 if you if you haven't been permission for tier 2 which is the ability to spreads and stuff just send me an email we'll take care of it for you will get you the evidence estimate we have a team itas broker that's right we have a team and toss of TD that will take care of you now we've been putting in place for a long time which is which is spreads and all that kind of stuff but tier 3 is a little bit more difficult you have to meet some qualifications it's essentially suitability based on SEC requirements but for futures it's not the same thing anybody can be approved for futures and then you can sell naked options it doesn't matter the account size it's a whole different set of suitability requirements just so you understand that so we conducted a study here just based on lower priced products whose margins would still be possible and tasty bite size accounts we know it's hard to get permission but if you have enough capital whatever it is or enough experience you know hopefully this works we can't is it's beyond us we're not a brokerage firm that's core so all we can do is just try to push you to the right people and help you you know any way we can so we look for high implied volatility because nothing changes you have to have high implied volatility on five lower price ETF CEM ewz FXI uso xle these are all kind of just some kind of commoditized ETF okay we sold one standard deviation strangle so these are all in the stocks in the 30s or 40s well Excel is a liar 84% out of the money put and call we held these to expiration we didn't even use stocks for this one the average credit we received is 91 cents the average buying power reduction for a one line was $683 that is not portfolio margin of course that is the average buying power reduction now if you think about that that does provide that's completely doable for most of the people even a tasty bite size account yeah if you have a $2,000 account unless you want to use $700 of that to do this but for the most part accounts are usually bigger than then that and that again requires approval everything else sure the smaller size account you're going to be putting a little bit more money into each strategy anyway because that's just the nature but using about six or $700 which was the average buying power reduction over a long period of time you generated you know in this case over 49 occurrences you generated thirty six hundred so forty nine occurrences is essentially four years hmm it's a little over four years but a little over four years agenor ated $3,600 in process of P&L with 95% winners which is almost exactly the way it's supposed to be with an average return of capital 13.3% the biggest loss Peggy $218 take away on this take away on this is this is the way you get to that number when you try to make a hundred percent your money with a 95 percent chance of success that's all it is right that's it now again it's not for everybody but listen you know what you have to sit down if you walked into an advisor and the person said to you listen I don't know how I'm going to do but I'm going to have a 95% chance that I'm going to make you 35 or 50 or 100 percent of your money you'd probably say go for it sure a research team said wanted to take away from this using similar margin on a tool at iron condors say five twenty wide on a stock you can sell a strangle with a much higher probability of profit and get the same type of return that was one of their takeaways okay um there there is for me the bigger picture takeaway is that don't be scared because of account size I know there are limitations based on soon ability and permissioning and things like that but the but don't be scared like you'll hear these people all the time say oh man I would never do that you have unlimited risk sure have unlimited this hey you know what it is what it is okay unlimited risk is what it is and and in order to make a hundred percent profit like would Craig to the other day you have to put yourself in a position to take unlimited when we start his business that nobody said to us hey are you willing to risk it all it was just assumed

Channel: tastytrade

Views: 92,733

Rating: 4.8849173 out of 5

Keywords: tastytrade, tastytrade.com, tasty trade, tastytrade network, tom sosnoff, tony battista, finance, options trading, how to trade options, trading options successfully, tastytrade options, financial investment, stock market, Get Tasted, tasty bites

Id: b4Lbm_O1uAU

Length: 11min 23sec (683 seconds)

Published: Wed Mar 05 2014