How to sell options with a small account
3 Ways to Trade Options with a Small Account
imagine you're the best poker player
alive imagine you know the probabilities
perfectly you know when the call bet
fold whatever you know how the
probabilities pan out this is called
having positive expected value over time
you should make money because you're
playing the probabilities flawlessly but
even still if you sit down with a tiny
stack of chips if you get dealt a couple
bad hands in a row you could be out of
there you can go bust just by having a
couple bad beats it's the same deal with
trading if you sit down and you have a
little tiny baby account you're gonna
need a little luck to get by if you have
a few bad trades in a row even if you're
playing the probabilities just right
because trading is very much a
probabilities game you could blow up
your account and that's just a fact
so trading with the small account is
tough you can do it but it is tough I
think there are three ways that people
tend to approach trading with a small
account and in my opinion some more
better than others but we're gonna cover
all three of them the first approach is
by just yoloing your money you only have
200 bucks what can you afford
out of the money options they're cheap
they provide you with a significant
amount of leverage but really they're
more of a gamble than anything because
they have such high break evens and
theta degrades such a large percentage
of them that you really have to hope
that the stock moves quickly I can't say
that I haven't tried an earnings bet
before when I was first learning options
that's exactly what it did like three
times in a row and I lost all my money
even though one of the times they went
the way I expected because implied
volatility collapsed and it did not move
far enough people buy out of the money
options hoping that the stock price
moves quickly because they know that
time decay is gonna eat away at their
premiums quite fast so the best way they
think to do this is by buying before an
earnings call but what some people don't
realize is the expected move of the
stock it's already priced into the
premium of the option so you're paying
more for this out of the money option
and then once that expected move occurs
if it's not outside if it's not more
than what was anticipated if say people
thought I was gonna move 8% options were
priced in to reflect that kind of
volatility and it doesn't move past 8%
what ends up happening is even if it
goes the direction you expected your
premiums are going to collapse because
implied volatility collapses people no
longer want these options they don't
expect any volatility coming up in the
near future the binary event has passed
your premiums collapse so the stock
doesn't move quickly or if you get
what's called IV crushed if implied
volatility collapses which happens after
earnings and that will diminish your
premiums then you're out of money again
that kind of scenario you have negative
expected value you're not playing the
probabilities correctly you're just
hoping to get lucky and there was no
worse feeling than betting money on an
earnings play and then watching it just
evaporate like my twin brother Eric he's
my identical twin brother I remember one
morning he was thinking of doing an
earnings call and I was telling them
please don't do it because I've done it
before
multiple times and none of the times has
it panned out well I told him don't do
it you'll always regret it it wasn't
that much money that was betting at the
time was like for 250 bucks but he was a
college student so that's a lot of ramen
and things didn't go the direction he
planned and it's not just a coin flip
it's a weighted coin flip cuz he even if
it goes a direction you anticipated if
implied volatility collapses too much
you're still going to lose money you
know don't take my word for it let me
let me get him and actually let him tell
you how you felt felt horrible if you're
trying to take it seriously and you want
to actually stay in the game for a long
amount of time buying out of the money
options as a trading strategy generally
not gonna prove worthwhile yeah maybe
you'll win more likely you'll lose so
that's one approach is buying out of the
money options another approach is
trading spreads you only have so much to
trade maybe you want to diversify your
trades into a bunch of different
underlyings well if you want to make
options cheaper you buy call and you
sell a call against it or buy put and
sell put against it that's gonna reduce
the overall cost to the trade it's gonna
reduce the capital at risk sure it's
gonna limit the max profit you can make
but at least it's going to be cheaper
and you can diversify your trades a
little bit I think this is a fairly
decent approach to trading in a small
account but there are a couple issues
with it the first is the bid-ask spread
the bid-ask spread if it's really really
small if you're really lucky it's going
to be just a couple of cents wide but if
you're only trading with 200 bucks that
means to get in and out of the trade to
buy it the ask and sell the bid or vice
versa
you're giving up two dollars per trade
and that's one percent of your account
so just to get in and out is going to be
one percent of your account and this is
assuming that you have positive expected
value that you're gonna actually be
trading well but as a beginner you're
probably gonna have negative expected
value which means you know right now
you're probably gonna not be playing the
probabilities correctly and you're going
to be more than likely losing a little
bit of money so you're eating away into
your capital with the bid-ask spread and
then you're also eating away into your
capital because you're just trying
things out you just
and learning not only that but you're
trying to have a nice plethora of
diverse trades you're probably gonna be
limiting your max profit quite a bit to
make those trades cheap you have to sell
a call pretty close to the call you
bought or put whichever type of spread
you're doing what that's gonna do is
it's gonna reduce your max profit by a
significant amount so the bid-ask spread
is eating into your capital you probably
have negative expected value which is
going to eat into your capital and then
your max gains on these trades is not
gonna be that high anyway so is it
really worth it so you can do it I'm not
saying you can't and it's probably more
likely that you'll be successful and at
least be in the game longer than if
you're trading out of the money options
but I think the best way in my opinion
is this third approach and that
approaches don't trade options and I
kind of hate saying that but once you
save up enough money maybe you like get
up to a grand you have so much more to
play with you can handle having a few
bad beats in a row you can handle the
bid-ask spreads and you have enough time
to practice the point where one might
actually get positive expected value if
you start with 200 bucks and you lose
those 200 bucks in the next month you
throw another 200 in and you lose most
of that and the next month you know that
throw another 200 and it's just you just
restarting every month you want to have
a nice juicy amount of capital play with
so what I would suggest is just throw
200 bucks in your brokerage account and
then the next month throw another 200
bucks in do it again and again again
until you have about a thousand dollars
in your account and then probably should
still stick to spreads but then you can
handle all the things we've just
discussed sometimes the best answer is
the least fun answer to here and that is
exactly the one I'm giving you it's
don't trade options right now save up
until you have a nice pillowy cushion of
cash so I know trading is all about
being very active but sometimes there
are moments where you need to be patient
and this might be one of those moments
in the meantime it doesn't mean you
can't trade there's platforms like
thinkorswim by TD Ameritrade where you
can pay per trade all you want and you
can practice all sorts of different
strategies and take this time to learn
what kind of trader do you want to be
what kind of strategies do you want to
try learn how different option
strategies work what other people's
approaches are to the market says
everyone's approaches a little bit
different thanks for watching guys I'll
see you in the next one
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