Welcome to “The Top 3 Option Strategies For Small Accounts (Under $10K)” by Options with Davis. In this video, we will discuss the top three option trading strategies suitable for small account sizes. Many option trading strategies require a large starting capital, making them unsuitable for small accounts. We will explore alternative strategies that offer high probabilities of profit and defined maximum risks. The video will provide timestamps for each strategy discussed and mention related videos on rolling covered calls, stock repair strategy, and the Wheel Strategy playlist. Feel free to leave a comment or ask any questions as we delve into the world of options trading for small accounts.
Account Size and Risk Allocation
When it comes to trading options with a small account size, it’s important to consider risk allocation and size your trades accordingly. With limited capital, you want to be mindful of how much of your account you allocate to each trade. A general rule of thumb is to risk no more than 1-2% of your account on any single trade. This means that if you have a $5,000 account, you should aim to risk no more than $50-100 on each trade.
By keeping your risk allocation in check, you can ensure that even if you have a few losing trades, you won’t blow up your account. It’s all about preserving capital and managing risk, especially when trading with a smaller account size. So, before entering any trade, make sure to calculate your position size and set your stop loss accordingly to stay within your risk tolerance.
Back Call Spread
One option trading strategy that is suitable for small accounts is the Back Call Spread. This strategy involves placing a limit order to take profits, allowing you to define your maximum risk. The Back Call Spread is a bullish strategy where you buy a call option and simultaneously sell a higher strike call option with the same expiration date.
The goal of this strategy is to profit from an increase in the price of the underlying stock. By selling the higher strike call option, you can offset the cost of buying the lower strike call option, reducing the overall cost of the trade.
When implementing a Back Call Spread, it’s important to choose the right stocks that have the potential for an upward move. Look for stocks with strong fundamentals and positive market sentiment. Additionally, pay attention to the Greeks, especially delta, when selecting the appropriate strike prices for your spread.
Iron Condor
Another option trading strategy suitable for small accounts is the Iron Condor. This strategy is a combination of the Bull Put Spread and the Bear Call Spread, and it is designed to profit from a sideways or neutral market. The Iron Condor involves selling both a put spread and a call spread with the same expiration date.
The goal of the Iron Condor is for the stock price to remain between the two strike prices of the sold spreads until expiration. This way, both spreads can expire worthless, allowing you to keep the credit received when entering the trade.
When selecting stocks for an Iron Condor, it’s important to choose stocks with low volatility and a high probability of staying within a certain range. This strategy works best in quiet, sideways markets where the stock price is not expected to make significant moves in either direction.
Choosing the Right Stocks
When trading options with a small account size, choosing the right stocks is crucial. Since you have limited capital, it’s important to focus on stocks that are within your price range. Look for stocks that are reasonably priced and have good liquidity. Avoid stocks that are very expensive or illiquid, as they can make it difficult to enter and exit trades.
Additionally, pay attention to the fundamentals of the stocks you are considering. Look for companies with solid financials, positive earnings growth, and a strong market position. It’s also helpful to consider the industry and sector trends to ensure you’re trading stocks that have the potential for future growth.
By selecting the appropriate stocks for your options trades, you can increase your chances of success and maximize your profits.
Selecting the Appropriate Delta
Delta is an important Greek to consider when trading options, especially with a small account size. Delta measures the rate of change of an option’s price in relation to changes in the price of the underlying asset. It ranges from 0 to 1 for call options and -1 to 0 for put options.
When trading options with a small account size, it’s generally recommended to stick with options that have a delta between 0.30 and 0.40. These options are considered to have a moderate risk/reward profile and are less likely to experience significant price swings.
Higher delta options have a greater potential for profit but also come with more risk. Lower delta options have a lower profit potential but are also more conservative. By selecting options with a moderate delta, you can strike a balance between risk and reward and increase the probability of success.
Aiming for a Specific Credit
When implementing option strategies with a small account size, it’s important to aim for a specific credit when entering trades. The credit received is the maximum profit potential of the trade, and it’s crucial to have a target in mind.
The credit you aim for will depend on the specific strategy you are using and the width of the spread. For example, with a Bull Put Spread, you might aim for a credit of $1 to $1.50 for a $5 wide spread. With an Iron Condor, you might aim for a credit of $2 to $3 for a $10 wide spread.
By having a specific credit target, you can better manage your risk and reward. It’s important to stay disciplined and not settle for a lower credit or chase a higher credit, as this can significantly impact the profitability of your trades.
Taking Profit at 50%
One key aspect of trading options with a small account size is taking profits at a certain point. It’s important to have a target profit in mind and not get greedy. A common rule of thumb is to take profits at around 50% of the maximum profit potential.
By taking profits at 50%, you lock in a solid return and reduce the risk of the trade turning against you. This also allows you to free up capital for new trades and avoid tying up all your funds in a single position. Remember, in options trading, it’s all about managing risk and preserving capital.
Cutting Loss if Short Strike is Breached
Unfortunately, not all trades will work out as planned. That’s why it’s important to have a predefined exit strategy for when things go wrong. When trading options with a small account size, it’s crucial to cut losses if the short strike is breached.
If the stock price moves against you and the short strike of your spread is breached, it’s a sign that the trade is not going as expected. In this case, it’s best to exit the trade and cut your losses. By doing so, you can minimize your losses and preserve your capital for future trades.
Don’t fall into the trap of hoping for a turnaround or thinking that the stock will eventually come back in your favor. It’s important to stay disciplined and stick to your exit strategy to protect your account.
Holding to Expiration
While it’s generally recommended to take profits and cut losses before expiration, there may be instances where it makes sense to hold the trade until expiration. This is particularly true for options with a low time value and minimal extrinsic value remaining.
If the trade is well within your desired range and there is little to no risk of the short strike being breached, holding the trade until expiration can maximize your profits. However, it’s important to closely monitor the trade and be prepared to exit if the situation changes.
There is always a trade-off between holding to expiration for maximum profit potential and taking profits early to protect your gains. It’s a decision that should be made on a case-by-case basis, considering the specific circumstances of the trade.
Conclusion
Trading options with a small account size is possible with the right strategies and risk management techniques. By allocating your risk appropriately, choosing the right stocks, selecting the appropriate delta, aiming for a specific credit, and following an exit strategy, you can increase your chances of success.
Remember, trading options involves risk, and it’s important to always do your own due diligence and research before entering any trade. Keep learning, practicing, and refining your strategies, and you’ll be on your way to trading options successfully with a small account size. Happy trading!