In the world of options trading, there are numerous strategies to choose from. However, not all of them are suitable for small accounts, especially those under $10K. One popular strategy, the Wheel Strategy, requires a significant amount of capital and may not be accessible to traders with smaller account sizes. In this video, we will explore the top three option strategies specifically tailored for small accounts. These strategies include the bull put spread, the bear call spread, and the iron condor. By implementing these strategies, even with an account size of $5K or $3K, you can still engage in profitable options trading. Let’s dive in and discover these three captivating strategies together.
Strategy 1: Bull Put Spread
Explanation of the Bull Put Spread Strategy
The Bull Put Spread strategy is a defined-risk, bullish options strategy that involves selling a put option and buying a put option further out of the money to limit potential losses. This strategy is suitable for small account sizes as it provides a high probability of profit and helps to manage risk effectively. By selling a put option, you collect premium and take advantage of time decay. The goal is for the underlying stock to stay above the strike price of the put option you sold, so that the options expire worthless and you keep the premium as profit.
How to select the right indicators and strike prices
To select the right indicators for the Bull Put Spread strategy, it is recommended to use the Stochastic indicator or the RSI (Relative Strength Index). These indicators help identify overbought or oversold conditions in the market, allowing you to determine the optimal time to enter the trade. Since the Bull Put Spread strategy is bullish, you should wait for the indicators to show oversold conditions before putting on the trade.
When selecting strike prices for the Bull Put Spread strategy, it is important to consider the probability of profit. Aim for a delta of 20 to 30 for the short put option, which means there is roughly a 20-30% chance that the option will be in the money at expiration. Additionally, set the width of the spread to be around $5 or $10. For example, if you sell a put option at a strike price of $100, buy a put option at a strike price of $95 or $90.
Trade management techniques
To effectively manage the Bull Put Spread trade, there are several techniques you can use. First, set a profit target at around 50% of the premium collected. Once the trade reaches this profit target, consider closing the position to lock in the gains. Additionally, it is important to have a predetermined maximum loss in mind. If the trade goes against you and the stock price approaches your short put strike, consider closing the trade to limit further losses. Finally, closely monitor the trade and make adjustments if necessary to protect profits or minimize losses.
Trade example: Bull Put Spread on IWM
Let’s take a look at a trade example to better understand how the Bull Put Spread strategy can be implemented. Assume the current price of the IWM ETF is $200 and you sell a put option with a strike price of $190, collecting a premium of $1.50. To limit potential losses, you buy a put option with a strike price of $185 for a premium of $0.50.
In this scenario, the maximum profit you can achieve is $1.00 ($1.50 premium collected – $0.50 premium paid), and the maximum loss is $4.00 ($5.00 width of the spread – $1.00 premium collected). As long as the price of IWM remains above $190 at expiration, the options will expire worthless and you will keep the premium as profit. If the price of IWM drops below $190, you may need to consider closing the trade to limit losses.
Strategy 2: Bear Call Spread
Explanation of the Bear Call Spread Strategy
The Bear Call Spread strategy is a defined-risk, bearish options strategy that involves selling a call option and buying a call option further out of the money to limit potential losses. This strategy is suitable for small account sizes as it allows traders to profit from downward price movements while managing risk effectively. By selling a call option, you collect premium and take advantage of time decay. The goal is for the underlying stock to stay below the strike price of the call option you sold, so that the options expire worthless and you keep the premium as profit.
How to select the right indicators and strike prices
Similar to the Bull Put Spread strategy, the Stochastic indicator or the RSI can be used to select the right timing for entering the Bear Call Spread trade. Look for overbought conditions in the market before initiating the strategy.
When choosing strike prices for the Bear Call Spread, aim for a delta of 20 to 30 for the short call option. This means there is roughly a 20-30% chance that the option will be in the money at expiration. Additionally, set the width of the spread to be around $5 or $10. For example, if you sell a call option with a strike price of $210, buy a call option with a strike price of $215 or $220.
Trade management techniques
To effectively manage the Bear Call Spread trade, similar techniques as in the Bull Put Spread strategy can be applied. Set a profit target at around 50% of the premium collected and consider closing the trade when it reaches this target. Have a predetermined maximum loss in mind and consider closing the position if the trade goes against you and the stock price approaches your short call strike. Monitor the trade closely and make adjustments if necessary to protect profits or minimize losses.
Trade example: Bear Call Spread on [Stock Name]
Let’s consider a trade example to illustrate how the Bear Call Spread strategy can be implemented. Assume the current price of a stock is $250 and you sell a call option with a strike price of $260, collecting a premium of $2.50. To limit potential losses, you buy a call option with a strike price of $265 for a premium of $0.50.
In this scenario, the maximum profit you can achieve is $2.00 ($2.50 premium collected – $0.50 premium paid), and the maximum loss is $3.00 ($5.00 width of the spread – $2.00 premium collected). As long as the price of the stock remains below $260 at expiration, the options will expire worthless and you will keep the premium as profit. If the price of the stock rises above $260, consider closing the trade to limit losses.
Strategy 3: Iron Condor
Explanation of the Iron Condor Strategy
The Iron Condor strategy is a neutral options strategy that involves combining both the Bull Put Spread and the Bear Call Spread. It is suitable for small account sizes as it provides a defined-risk strategy that can be used when there is no bullish or bearish bias in the market. The Iron Condor helps traders take advantage of range-bound or sideways market conditions. It involves selling a put option and a call option, while also buying a put option and a call option further out of the money to limit potential losses.
How to select the right indicators, deltas, and width
When selecting the right indicators for the Iron Condor strategy, it is important to look for neutral conditions in the market. Choose indicators such as Stochastics or RSI that show neither overbought nor oversold conditions. This indicates a lack of bullish or bearish bias in the market.
For the Iron Condor, aim for a delta of 20 to 30 for both the short put option and the short call option. This ensures a probability of profit around 70% while still keeping the strategy neutral. Set the width of the spread to be around $5 or $10, just like in the Bull Put Spread and Bear Call Spread strategies.
Trade management techniques
To effectively manage the Iron Condor trade, similar techniques can be applied as in the previous strategies. Set a profit target at around 50% of the premium collected and consider closing the trade when it reaches this target. Have a predetermined maximum loss in mind and consider closing the position if the trade goes against you and the stock price approaches your short put or call strikes. Monitor the trade closely and make adjustments if necessary to protect profits or minimize losses.
Trade example: Iron Condor on CRM
Consider a trade example to understand how the Iron Condor strategy works. Assume the current price of CRM stock is $300. To implement an Iron Condor, you sell a put option with a strike price of $290, collecting a premium of $2.50. Additionally, you sell a call option with a strike price of $310, collecting a premium of $2.00. To limit potential losses, you buy a put option with a strike price of $285 for a premium of $1.00, and buy a call option with a strike price of $315 for a premium of $0.50.
In this scenario, the maximum profit you can achieve is $1.00 ($2.50 + $2.00 – $1.00 – $0.50), and the maximum loss is $4.50 ($5.00 width of the spread – $1.00 premium collected). As long as the price of CRM remains between $290 and $310 at expiration, the options will expire worthless and you will keep the premium as profit. If the price of CRM moves beyond these strike prices, consider closing the trade to limit losses.
By combining the Bull Put Spread and Bear Call Spread strategies, the Iron Condor provides a versatile strategy that can be used in ranging market conditions.
Strategy 5: Back Call Spread
Explanation of the Back Call Spread Strategy
The Back Call Spread strategy is another option strategy suitable for small account sizes. It involves placing a limit order to take profits when the price of the underlying stock reaches a certain level. This strategy allows traders to capture potential upside while limiting potential losses.
Placing limit orders for taking profits
To implement the Back Call Spread strategy, you sell a call option with a strike price closer to the current price of the underlying stock and buy a call option further out of the money. The goal is for the stock price to rise and reach the level of your limit order, at which point you can close the position and take profits. This strategy allows you to define your profit target and ensures that you exit the trade when your desired level is reached.
Trade example: [Stock Name] Back Call Spread
Let’s consider a trade example to understand how the Back Call Spread strategy works. Assume the current price of a stock is $200. To implement the Back Call Spread, you sell a call option with a strike price of $205 and buy a call option with a strike price of $210. You place a limit order to close the position when the stock price reaches $215.
In this scenario, if the stock price rises to $215, your limit order will be triggered and you will close the position, taking profits. The premium collected from selling the call option with a strike price of $205 offsets the cost of buying the call option with a strike price of $210. This strategy allows you to profit from the upward movement of the stock while managing risk.
Strategy 6: Holding onto a Trade
Explanation of the strategy of holding onto a trade
The strategy of holding onto a trade involves keeping a position open even if it goes against you, as long as there is still more than 21 days remaining until expiration. This strategy allows traders to give the trade more time to work in their favor and potentially turn losses into profits.
Conditions for holding onto a trade
When implementing the strategy of holding onto a trade, it is important to consider several conditions. First, ensure that there is still more than 21 days remaining until expiration. This allows sufficient time for the trade to potentially turn in your favor. Additionally, closely monitor the trade and set a predetermined stop-loss level to protect against excessive losses. If the stock price approaches your stop-loss level, consider closing the trade to limit losses.
Trade example: [Stock Name] trade that went against you
To better understand the strategy of holding onto a trade, let’s consider a trade example. Assume you purchased a call option on a stock with an expiration date 30 days away. After initiating the trade, the stock price initially decreases, causing the value of the call option to decrease as well.
In this scenario, if there are still more than 21 days remaining until expiration, you may choose to hold onto the trade and give it more time to recover. By holding onto the trade, you have the opportunity to potentially turn the losses into profits if the stock price increases before expiration. However, closely monitor the trade and be prepared to close it if the stock price approaches your stop-loss level.
Strategy 7: Iron Condor
Explanation of the Iron Condor Strategy
The Iron Condor strategy, previously discussed in Strategy 3, combines the Bull Put Spread and Bear Call Spread strategies into a single trade. It is a versatile options strategy suitable for small accounts that can be used in range-bound or sideways market conditions. The Iron Condor provides defined risk and incorporates both bullish and bearish positions.
Combining previous strategies into an iron condor
To implement an Iron Condor, you simultaneously sell a put option and a call option that are out of the money, while also buying a put option and a call option further out of the money. This combination allows you to collect premium from selling options while limiting potential losses with the purchased options.
The goal of an Iron Condor is for the underlying stock to remain within a specific price range. As long as the stock price stays between the strike prices of the sold options, all options will expire worthless and you will keep the premium as profit.
Maximum risk and suitability for small accounts
One of the advantages of the Iron Condor strategy, especially for small accounts, is the defined maximum risk. The width of the spread determines the maximum loss, which is limited to the difference in strike prices of the sold options minus the premium collected.
The Iron Condor strategy is suitable for small accounts because it allows traders to capitalize on neutral market conditions while managing risk effectively. By combining elements of the Bull Put Spread and Bear Call Spread strategies, the Iron Condor maximizes profit potential while ensuring a defined risk.
Trade example: Iron Condor on [Stock Name]
To better understand how the Iron Condor strategy works, let’s consider a trade example. Assume the current price of a stock is $300. To implement an Iron Condor, you sell a put option with a strike price of $290 and collect a premium of $2.50. Additionally, you sell a call option with a strike price of $310 and collect a premium of $2.00. To limit potential losses, you buy a put option with a strike price of $285 for a premium of $1.00, and buy a call option with a strike price of $315 for a premium of $0.50.
In this scenario, the maximum profit you can achieve is $3.00 ($4.50 premium collected – $1.50 premium paid), and the maximum loss is $1.50 ($5.00 width of the spread – $3.50 premium collected). As long as the price of the stock remains between $290 and $310 at expiration, the options will expire worthless and you will keep the premium as profit. If the price of the stock moves beyond these strike prices, consider closing the trade to limit losses.
Trade Mechanics
Selecting the right indicators for trade entry
When selecting the right indicators for trade entry, it is important to consider the overall market conditions and the specific strategy being used. The Stochastic indicator and the RSI (Relative Strength Index) are commonly used indicators to determine overbought or oversold conditions.
For bullish strategies like the Bull Put Spread, look for oversold conditions in the market before initiating the trade. Conversely, for bearish strategies like the Bear Call Spread, look for overbought conditions. For the Iron Condor strategy, neither overbought nor oversold conditions are desired, as the goal is to profit from range-bound market conditions.
Choosing appropriate strike prices
Choosing appropriate strike prices depends on the specific strategy being utilized. For the Bull Put Spread and Bear Call Spread strategies, aim for a delta of 20 to 30 for the short options. This represents a 20-30% chance that the options will be in the money at expiration. Additionally, set the width of the spread to be around $5 or $10 to limit potential losses.
For the Iron Condor strategy, strike prices are selected for both the put options and the call options. The sold options should be out of the money, while the purchased options should be further out of the money. The goal is for the underlying stock to remain within a specific range, between the strike prices of the sold options.
Applying trade management techniques
Trade management techniques are crucial for successful options trading. These techniques help protect profits, limit losses, and ensure that the trade is being monitored effectively. Some common trade management techniques include setting profit targets, predefining maximum loss levels, and adjusting positions if necessary.
For all the strategies discussed, it is recommended to set a profit target at around 50% of the premium collected. Closing the trade when the profit target is reached helps ensure that gains are locked in. Additionally, it is important to set a predetermined maximum loss level to limit potential losses. If the trade goes against you and approaches the maximum loss level, consider closing the position to protect your capital. Regular monitoring of the trade is essential, as adjustments may be needed depending on changing market conditions.
Conclusion
In this video about the top 3 option strategies for small accounts, we discussed the Bull Put Spread, Bear Call Spread, and Iron Condor strategies. These strategies provide defined risk and allow traders to effectively manage their trades while capitalizing on bullish, bearish, or neutral market conditions. By selecting appropriate indicators, strike prices, and applying trade management techniques, traders with small account sizes can successfully utilize these strategies to generate profits. It is important to remember that options trading carries inherent risks, and traders should conduct thorough research and analysis before implementing any strategy.