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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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