Small Account Options Trading (Tips, Strategy & Considerations)

in this video I'm going to be talking about trading options and smaller options trading accounts and when I say smaller options trading accounts typically I'm going to be referring to an account with 2500 to 5000 dollars in the account keep in mind that you'll need at least 2000 dollars at any brokerage firm to open a margin account and if you don't have a margin account you're going to be severely limited with the option strategies that you can trade in the first place and since we are limited in a small options trading account as it is it's going to be even more difficult without a margin account so I would recommend having at least 2,000 dollars in a margin account so that you can have full access to options trading privileges I trade with tasty works and with a two thousand dollar deposit you can apply for a margin account with full options trading privileges but at other brokerage firms you may have tiered access meaning that depending on the tier of privileges that you have you'll have access to a small basket of option strategies and once you unlock the next year you'll unlock more option strategies and finally with the highest tier you'll have the ability to trade basically any option strategy that you want so long as you have the appropriate amount of money in your account to cover the margin requirement trading options in a small trading account is very difficult because since you have a limited amount of money it's very difficult to trade a small portion of your account since you can only really get so small with the option strategies that you're trading for example if you have twenty five hundred dollars in a margin account if you put on a position with five hundred dollars of lost potential that represents twenty percent of your account in risk and obviously that's a very large position given that you could potentially lose twenty percent of your account if that trade were to realize the maximum loss potential of five hundred dollars unfortunately it's very difficult to risk just five to ten percent of a small options trading account because if you do have let's say twenty five hundred dollars in an account and you wanted to risk five percent of that option trading account that would be risking one hundred and twenty five dollars to be honest entering an option strategy with just a hundred and twenty five dollars of risk is going to be very difficult because you're going to to trade very low price stocks and or you're going to have to trade option spreads with very narrow spreads and in that case the maximum profit potential is going to be very very low and in most cases the Commission's require to enter those positions is going to eat into a decent chunk of your maximum profit potential we all want that homerun trade that can earn us a significant amount of money or earn us a significant return on our total account in a very short period of time and I think that urge is even stronger in a small options trading account because you thinking if you could just have one big win then you'll have much more money to work with and everything will be easier but unfortunately it's not that easy before getting to these small account options strategies and back tests and my other tips and tricks I need to talk about the difficulties of trading in a small options trading account so that when we move forward we can understand these difficulties and try to figure out ways to work with them the first problem with trading in a small options trading account is the risk problem as I mentioned earlier when you're trading options you can only really get so small and when you have a small options trading account that means you're going to be risking a high percentage of your account in every trade or at least you're going to be tying up a significant amount of margin in one position because with a small options trading account if you put on a trade with only two or three hundred dollars of risk that could represent a high percentage of your account the first thing that you need to be comfortable with when trading in a small options trading account is putting on a position that is going to require a significant amount of margin requirement relative to your account size now because your maximum loss potential is equal to 10 or 20 percent of your small options trading account it doesn't necessarily mean that you're going to be risking that amount because in this video I'm going to recommend that you manage trades before expiration and when you're strict with your trade management and you do not hold trades until expiration the likelihood of realizing the maximum loss potential on any trade is very low so in the worst case scenarios I would say that you are not actually going to be losing the amount of your max loss potential in a trade that goes against you the second problem I need to talk about before getting to the small account options trading strategies is the number of positions that you can trade in a small trading account now as we've already discussed if you have a $5000 account and you're putting on a position with $500 in margin that is going to represent a maximum loss of 10 percent of your account in the worst-case scenario now a lot of people will think that it's better to trade more positions in an options trading account because with more positions you are technically diversified but in my opinion you are not and if you are adding more positions to your portfolio more than likely they are going to be correlated especially if you're putting on say two different iron condors and two different stocks and if the market plummets more than likely you're going to lose a lot of money on both of those trades so trading two positions is not actually helping you in this case it's just actually increasing your risk overall and in your portfolio and in a small options trading account I would not recommend trading more than two positions at a time and for the most part I would say it would be best to start with just one position at a time because if you are trading in a small options trading account it's likely that you are a beginner and by focusing on just one options trading strategy you can focus on watching that particular position and learning about options by watching that particular positions changes on a day to day basis moving on to topic number three is trade management as I mentioned briefly before if you're putting on a trade that represents a loss potential of 10 to 20 percent of your small options trading account you need to have a system in place where you know exactly when you are going to exit that trade for a profit and for a loss now the loss management is far more important than knowing when you are going to close a trade for a profit so when you're trading in a small options trading account before you even put on a trade you need to know exactly when you're going to exit the trade for a profit and when you are going to exit it for a loss before getting to the strategies that you can potentially employ in a small options trading account let's talk about the products you are going to trade in my opinion the safer stocks and products to trade when you're trading in a small options trading account would be to stick with broad stock market ETF such as SP y or IWM or even QQQ which is the nasdaq-100 ETF I know it is enticing to trade penny stocks with a smaller options trading account because the options are cheaper and therefore you will have more access to different options trading strategies on those penny stocks but you have to keep in mind that when you are trading options you are trading outlooks on a company's stock price and because of that I would not trade any obscure stocks I would stick to broad stock market ETFs or very well-known stocks such as Apple or potentially even something like Netflix if you have a higher risk tolerance let's go ahead and hop over to the tasty works trading platform and also the option that explore options trading analysis software so that I can show you potential trade setups that you can use in small options trading accounts I can show you the difference between margin and risk when using the same exact option strategy but on two different products that have different stock prices and also I'm going to simulate and backtest some of these strategies to show you how we can expect the trade to perform and how they can potentially be managed before expiration to avoid any blowout trades I hope those explanations helped and you are more comfortable with how you can potentially set up and execute a trade and a small options trading account and that you understand how those positions could work out based on the passage of time changes in implied volatility and changes in the stock price right now we are looking at the tasty works trading platform and specifically I have the option chain open for SP Y which is the SP 500 ETF I love spy because it has a lot of liquidity and as we can see here today spy traded 113 million shares and if I go ahead and open up an option chain we can see how much activity is actually in the options as well so if we look at the open interest columns for the call options and the put options we can see that the call options have thousands and thousands of open interest and the same for the put options as well the specific strategy that I'm going to start with is called the short Iron Butterfly and I like this strategy because it is a directionally neutral strategy and it has limited lost potential so I have an entire video dedicated to the Iron Butterfly strategy which I will link in the description below but just to recap an Iron Butterfly strategy is when you sell the at the money straddle and then you buy a put option below the strike price and then buy another call option above the strike price so another way to interpret it is selling a call spread and selling a put spread with the same exact short strike so spike lows today at 333 48 so that means we can pretty much choose the 333 or the 334 strike price as the short strike for this position so I'm going to go ahead and use the 333 strike and to queue up in order to sell it I'm gonna click on the bid for the 333 call and then I'm gonna click on the bid for the 333 put and then to complete this iron butterfly position I need to purchase another option above the market or above this strike price and then purchase a put option at a strike price lower than 333 so what I'm gonna do is actually purchase the call option with a delta near 15 I'm gonna do that for demonstrational purposes and if there's no real specific reason I'm doing that but it is a methodical way you can use to choose strike prices for any strategy that you're using so I can already see that the 344 call option has a delta of 0.14 and that is the closest strike to the delta of 0.15 so I'm going to click on the asking price for the 344 call and then I'm gonna do the same thing on the put side so right away I can see the 314 put has a delta of 0.15 so I click on the asking price for the 314 put now we can see that I have a short iron butterfly position and the current credit is nine dollars and 99 butterfly the maximum profit potential will be nine hundred and nine dollars and the maximum loss potential in this case is nine hundred and ninety one dollars which would give us a buying power effect or margin requirement of just about a thousand dollars for this position so if you were trading a twenty five hundred dollar account this is a limited risk strategy that you could put on but obviously this is a lot of risk relative to $2,500 one of the things that you could do to reduce this would be to trade an Iron Butterfly with narrower strike prices particularly the options that you're buying so I could move this in two points to the 342 call and then I could move up the put to the 316 put as opposed to the 314 put and now this has a margin requirement of 865 dollars as opposed to $1,000 but as I move the strike prices that I'm purchasing closer to the short straddle I will actually collect less of a credit and therefore my maximum profit will also decrease if you need to decrease the risk one way you could do that is by moving the strike prices closer to the short straddle so before going ahead and actually visualizing this position and doing a simple back test I want to look at this exact same trade structure but on IWM so I'm gonna go ahead and clear this trade I'm gonna switch over to IWM and IWM is the Russell 2000 ETF so I'm gonna open up the March 2020 options and those have 28 days to go and really quickly I'm gonna do the same exact thing as I did before so I'm gonna sell the at the money straddle and buy the 15 Delta call option and put option so IWM was at 167 ten when it closed so I'm gonna click on the bid price of both the put and the call at the 167 strike and that cues up the short straddle and then I'm going to click on the asking price for the 174 call because I can see that the Delta of 0.14 and that is closer to 0.15 then the point 1 9 and point 1 1 Delta call options that are available at the adjacent strike prices so I'm gonna go to the put side and do the same thing and right away I can see the 157 foot has a delta of 0.15 so I'm gonna click on the asking price for the 157 foot so this is the same exact trade structure that I queued up in SP Y but since i WM is half the price of spy I'm expecting that this position will be smaller altogether so we can see that the credit is $4.95 and we can see that the maximum loss potential is 5 and $5 giving us a buying power effect or margin requirement of 505 dollars so this is the same exact trade structure as I just queued up in sp why but since IWM is a much lower price stock I can put this same exact position on but is it is essentially going to have half of the size as the one in spy because spy is twice as large now I will mention that IWM and spy will not move the same because IWM is the small-cap index whereas SP why is the SP 500 large-cap index and they do not have the same exact movements but they are both highly active products with great option markets so for this example I'm just showing you that if you have two different priced stocks you can set up the similar trade structure and it will be cheaper and require less margin requirement in the lower priced underline so now that I've gone through this trade structure let's go to option that explore and then actually do some simple back tests so that we can understand what this position looks like in terms of the payoff graph and then also do a simple back test to see a profitable and unprofitable scenario I've opened up option net Explorer which is options trading analysis software and I can use this to back test certain strategies and also model different trade adjustments to see exactly how it will change my expected profit and loss curves and it's cool because I can look at the expected loss curves at different intervals and time in the future and I'll show you what I mean by that so right now I have January 15th 2020 opened up about 30 minutes before the market closes and we can see that the last price for IWM was 166 53 so I'm gonna queue up the exact same trade structure that I looked at on tasty works and that means I'll be looking at a short iron butterfly and to start that position we know that the at-the-money strike price is 166 or 167 since IWM is at 166 53 so for this example I'll use the 167 strike price to start off our Shore straddle so the way I'll models this trade first of all I'm looking at the 37 day option cycle which has a little bit more than a month to go and to start this off I will selling one of the 167 calls by typing negative one into this model box and then I'll do the same thing for the 167 foot so I've gone to the 167 put I typed negative one in the model box and on the right hand side here we can see it updating with all the model trades that I enter so currently I have a short straddle queued up and to finish this off I need to purchase the call option with the delta closest to 15 so that's the 173 call in this example and I'm gonna take positive 1 into the model box to simulate buying one of these contracts and then I'm gonna do the same thing on the put side by going to the 158 put typing positive 1 and now I have a modeled trade of this iron butterfly's structure that I was telling you about on tasty works so to actually commit this simulated trade and therefore execute it and see how it performs going forward I can click commit trade up here and this will bring up a window with the price and let's say I sold this for $4 and 21 cents we're four dollars and 20 cents I'm sorry I hit save and this trade is now committed so on the bottom left I can see the cost of the trade and the margin requirement as well as the Greeks and the P&L information as I go forward so we can see that the Delta is pretty close to zero and we can also visualize that by looking at this curve right here so right here the curve is relatively flat and that is a visual representation of a delta that is close to zero as we go further to the left and as the stock price Falls we can see that the Delta will get positive because if the stock price fell to 164 then an increase would help the PL and a decrease would lead to more losses on the other side if IW 1 and 1 to 170 we can see that at this point in the graph the P&L gets better if the stock price falls and the P&L gets worse as the stock price increases which is representative of negative Delta so now that I've had this position queued up we can go ahead and look at intervals in the future to see how the trade is expected to perform so this curve right here is actually the profit and loss expectation of this position for IWM stock price changes today so if we move forward in times that this next curve this curve is actually t plus 12 so this t plus 12 means today plus 12 days so these are the expected profits and losses for this position in 12 days if IWM is at these specific prices this next curve up is t plus 24 so in 24 days time if IWM is right here and there are no changes in implied volatility this is the expected profit and loss curve for this position in 24 days at various IWM prices to simulate the trades performance going forward i can click on this next trading day button up here and we're gonna jump forward in time and see what happens and talk about this position as time passes so the first day IWM gapped higher i'm going to continue clicking through we can see that IWM is still in this profitability area but it is not yet profitable so at this point i WM has fallen to 160 dollars now if you look at the profitability range we can see that the break evens are around 171 and 163 so IWM needs to be within this range for this position to be profitable at expiration but I like this example because we can see what happens when the stock price falls significantly so when I put the trade on IWM was around 167 and now at this point in time IWM is at 160 dollars so this position is not doing well but fortunately we can see that the loss is only a hundred and fifteen dollars which represents 25 percent of the maximum loss potential of around five hundred dollars so we can see the maximum loss down here is just less than five hundred dollars and because the loss right here is only a hundred and fifteen dollars it is still not a bad loss relative to what it could be earlier when I mentioned closing trades before expiration to avoid the worst case scenario this is exactly what I meant if I was uncomfortable with this position at this point in time which I probably would be if I was holding it I would probably close this position and take the loss of a hundred and fifteen dollars because at this point if I wim stayed right here and at expiration was still at this price a loss would be more than double that at around two hundred and seventy dollars which I can see right here on the chart as long as you manage a position before expiration you will not realize the maximum loss potential and this is a perfect example of an opportunity that you might have to close the position take your small loss and then potentially redo this position and reset your strike price to the current price so I'm going to go ahead and keep clicking forward so we can see what happens with this trade so things are going better and now it is back at the short strike so this is February 6 to 2020 and these options have 15 days left until they expire as we can see here IWM is right near the short strike of 167 and currently the trade is up $80 which is a 16 percent return on the 484 dollar margin requirement for this position so let's see what happens as I continue to go forward so now we're a couple days ahead and now these options have only 10 days left until expiration and the position is now up 115 dollars or almost 25 percent of the margin requirement of 484 dollars so as we can see here these lines are very very sloped and what this means is essentially it's a visual representation of gamma risk or the increased sensitivity of an option position as you get closer and closer to expiration so basically what I mean by that is we can see a small change in IWM stock price will drastically change the expected profitability of this position if I click one day forward or two days forward we'll notice that these lines get even steeper on each side so we can see that these lines are even steeper but fortunately IWM is still within this profitability range and at this point in time the trade is up a hundred and thirty dollars for 27 percent of the margin requirement of four hundred and eighty four dollars so at this point depending on how I'm managing this trade I would likely have a profit target and I would have had a loss limit but I would probably take this trade off because these options only have eight days left to go until expiration and as we can see here these expected P&L curve lines are getting very steep on either side and that means if IWM has one big movement day this position could easily go from a nice profit to a decent loss and I do not want to let that happen so in this instance I probably would close this trade the last thing I want to do is talk about things you should never do when trading a small options trading account the first thing you should never do when trading a small options trading account is selling naked options selling naked options means you are selling a call option or selling a put option without any protection against the movements against those positions so for example if you're selling a call option and that's the only trade that you're doing you have theoretically unlimited upside loss potential and if you are selling a put option without any protection below that put option in the form of another put option that you've purchased then you are going to have significant loss potential on the downside now the reason I would not recommend selling naked options in a small options trading account is first of all you are probably going to run into margin issues because selling naked options requires a significant amount of margin because the loss potential is so great now another reason that selling naked options is a problem and the bigger reason it's a problem is because you have theoretically unlimited loss potential particularly in the case of selling a naked call option but when you're selling a naked put option you have significant loss potential to the downside and if you're selling a call option you have theoretically unlimited loss potential to the upside so that means all it takes is one bad move against you and your small options trading account could turn into a $0 options trading account with just one bad trade so I would recommend sticking to limited risk strategies such as trading credit spreads or debit spreads or combining credit spreads into something like an iron Condor or a short iron butterfly all of those trades have limited lost potential the second thing I would never do in a small options trading account is trade too many positions as I mentioned earlier doesn't matter how many positions you trade if the stock market moves big in either direction it's very likely that your positions are going to become one larger position and what I mean by that is for example if you sold four different iron condors in four different stocks and the market drops 5% in the week it's very likely that all four of your iron Condor positions are going to be losing trades and they could potentially be very big losing trades and if you have four of those trades on at the same time not only is it going to be difficult to manage and exit four different positions but you could potentially experience a huge loss relative to your overall account so if you had a $5000 trading account and you put on four different iron condors with $500 in risk your overall margin requirement for those four iron condors would be $2,000 and that means your maximum loss potential should all four of those iron condors not work out is also going to be $2,000 and that represents a 40% loss on your overall $5,000 account if you're in a small options trading account I would stick to focusing on one position at a time the third thing to never do in a small options trading account and I touched on this earlier is trading obscure penny stocks because penny stocks are very low priced stocks their options are also going to be cheap and that's going to allow you to have more flexibility and the strategies that you can trade in a small options trading account but since you are trading a company when you are trading options and since your option position is going to make or lose money depending on what that stock price does I would not recommend trading obscure penny stocks and I would recommend sticking to broad stock market index ETFs such as SP y IW m or q QQ so that's gonna do it for this video if you have any questions please leave me a question down below in the comment section and I will get back to you as soon as I can my name is Chris from project option and I will see you in the next video [Music]

Channel: projectfinance

Views: 165,499

Rating: 4.9158468 out of 5

Keywords: small account options trading, trading options small account, options trading in a small account, options trading, small account, limited capital, finance, projectoption, short iron butterfly, defined risk options strategies, limited risk options strategies, optionnet explorer, tastyworks, number of positions options trading, stock market, options trading for beginners

Id: KAnNR651nMA

Length: 27min 21sec (1641 seconds)

Published: Fri Feb 21 2020