In the world of options trading, there are a multitude of option trading strategies. However, not all of these option trading strategies are suitable for small accounts. In fact, many of these strategies are quite capital intensive and require a big starting account. For example, one of the most popular option trading strategies is the Wheel Strategy. However, it’s very capital intensive and if you have an account size of under $10K, it will be difficult to trade it properly. So in this video, I will share with you the Top 3 Option Trading Strategies that are suitable for small account sizes. So even if you have an account size of $5K or even $3K, you can still trade these strategies!
The first strategy discussed is the bull put spread, a bullish defined risk option strategy. The bull put spread involves selling a put option and buying a put further out of the money to hedge the position. The maximum risk and potential profits are defined. The second strategy discussed is the bear call spread, a bearish defined risk option strategy. The bear call spread involves selling a call option and buying a call further out of the money to hedge the position. The maximum risk and potential profits are defined.
Strategy 1: Bull Put Spread
Overview
The bull put spread is a popular option trading strategy that is suitable for small account sizes. It is a bullish strategy that involves selling a put option and buying a put further out of the money to hedge the position. This strategy allows traders to define their maximum risk and potential profits.
Trade Mechanics
To implement the bull put spread strategy, you first need to identify a stock or index that you believe will increase in price. Using indicators such as the Stochastic indicator, look for oversold conditions in the market. This is the ideal time to initiate the bull put spread.
Once you have identified an oversold condition, you can start placing the trade. Sell a put option with a strike price that is slightly out of the money. For example, if the stock is trading at $100, you could sell a put option with a strike price of $95.
To protect your position, buy a put option with a strike price that is even further out of the money. In this example, you could buy a put option with a strike price of $90. By purchasing this put option, you limit the maximum risk of the trade.
Trade Management
After placing the trade, it’s important to actively manage it. Monitor the stock price and make adjustments as needed. If the stock price increases and stays above the short put strike price until expiration, you will earn the maximum profit on the trade.
On the other hand, if the stock price drops and breaches the short put strike price, you will need to take action. Consider closing the trade to limit potential losses. It’s crucial to have a predetermined stop-loss level to protect your account.
Example Trade
Let’s say you decide to trade the bull put spread on stock XYZ. The stock is currently trading at $100. You sell a put option with a strike price of $95 and receive a credit of $1. You also buy a put option with a strike price of $90.
If the stock price stays above $95 until expiration, your maximum profit would be $1 (credit received). However, if the stock price drops below $95 and breaches your short put strike, you would need to manage the trade and potentially close it to limit your losses.
Strategy 2: Bear Call Spread
Overview
The bear call spread is another option trading strategy suitable for small account sizes. It is a bearish strategy that involves selling a call option and buying a call further out of the money to hedge the position. This strategy also allows traders to define their maximum risk and potential profits.
Trade Mechanics
To implement the bear call spread strategy, you need to identify a stock or index that you believe will decrease in price. Using indicators such as the Stochastic indicator, look for overbought conditions in the market. This is the ideal time to initiate the bear call spread.
Once you have identified an overbought condition, you can start placing the trade. Sell a call option with a strike price that is slightly out of the money. For example, if the stock is trading at $100, you could sell a call option with a strike price of $105.
To protect your position, buy a call option with a strike price that is even further out of the money. In this example, you could buy a call option with a strike price of $110. By purchasing this call option, you limit the maximum risk of the trade.
Trade Management
Similar to the bull put spread, it’s important to actively manage the bear call spread trade. Monitor the stock price and make adjustments as needed. If the stock price decreases and stays below the short call strike price until expiration, you will earn the maximum profit on the trade.
However, if the stock price increases and breaches the short call strike price, you will need to take action. Consider closing the trade to limit potential losses. Having a predetermined stop-loss level is crucial in trade management.
Example Trade
Let’s continue with the example of trading the bear call spread, this time on stock ABC. The stock is currently trading at $100. You sell a call option with a strike price of $105 and receive a credit of $1. You also buy a call option with a strike price of $110.
If the stock price stays below $105 until expiration, your maximum profit would be $1 (credit received). However, if the stock price increases above $105 and breaches your short call strike, you would need to manage the trade and potentially close it to limit your losses.
Strategy 3: Iron Condor
Overview
The iron condor is a more complex option trading strategy suitable for small account sizes. It is a neutral strategy that involves combining both the bull put spread and the bear call spread. This strategy is typically used when there is no clear bullish or bearish bias in the market.
Trade Mechanics
To implement the iron condor strategy, you start by establishing both a bull put spread and a bear call spread on the same stock or index. This creates a range within which you expect the price to stay until expiration. By doing so, you define your maximum risk and potential profits.
The bull put spread is created by selling a put option with a strike price below the current stock price and buying a put option further out of the money to hedge the position.
On the other hand, the bear call spread is created by selling a call option with a strike price above the current stock price and buying a call option further out of the money to hedge the position.
Trade Management
As with the previous strategies, trade management is crucial for the iron condor. Monitor the stock price and make adjustments as needed. Ideally, you want the stock price to stay within the range defined by the bull put spread and the bear call spread until expiration to maximize profits.
If the stock price breaches either the short put strike or the short call strike, you will need to take action. Consider closing the trade or making adjustments to limit potential losses. Having a well-defined trade management plan is essential in executing the iron condor strategy successfully.
Example Trade
Let’s consider an example of trading the iron condor on stock XYZ. The stock is currently trading at $100. You sell a put option with a strike price of $95 and receive a credit of $1. You also buy a put option with a strike price of $90. Additionally, you sell a call option with a strike price of $105 and receive a credit of $1. You buy a call option with a strike price of $110.
If the stock price stays between $95 and $105 until expiration, both the bull put spread and the bear call spread would be profitable, resulting in the maximum profit. However, if the stock price breaches either $95 or $105, you would need to manage the trade and potentially close it to limit your losses.
Conclusion
In conclusion, the bull put spread, bear call spread, and iron condor are three option trading strategies suitable for small account sizes. These strategies allow traders to define their maximum risk and potential profits, providing more control in managing their trades.
By properly implementing these strategies, traders with limited capital can still participate in the options market and potentially generate consistent profits. However, it’s important to remember that options trading involves risks and careful trade management is essential for long-term success.