What really baffles me, is that traders often think they need to go to the futures or Forex markets when they have a small account size. In reality, you need a much larger account size to trade many of those markets when compared to options. Unfortunately, people are programmed to think trading options requires a large account size. To show an example of this, I will cover 5 option trades that we have taken over the last month that have required less than $300 of capital per trade. Before we get to those trades, I want you to think about something while you read the rest of this article. After seeing the results of the survey we sent out to traders, I decided to take a look back at my trade journal to see how many option trades were taken in the last month with less than $300 of risk per trade.
The financial stocks are often times big market leaders and one of the names that we trade is Citigroup.
Back in late September we had a short setup print on our Active Swing Trader chart which had us looking to play a move to the downside (see below). So those were 5 trades taken in the last month that required less than $300 of capital per trade. I just showed you 5 examples of trades that took less than $300 to take and resulted in between 60-125% profits. Bottom line is this, don’t get fooled into thinking options take a ton of money and time to be successful with. If you trade a small account, you probably know that one of the biggest challenges is that commissions eat up a good chunk of your profit on a small options trade. Note that the reason to risk a small amount per trade is that a small dollar amount can be a significant percentage of equity in a small account. The trade begins with a slightly bearishly positioned Put Butterfly in SPY with 7 point wide wings. The trade is positioned slightly below the money and, due to skew, the trade will benefit if price trades lower.
On the downside, I roll down the Butterfly to ATM when price trades to within 2-3 points of the lower long leg. One quick note is that if the initial Butterfly can be taken off for a $75 gain with more than 3 weeks to expiration, I frequently close the position and wait for the next cycle. Enter the trade when the market is short term overbought and less likely to trend consistently higher.
The first upside adjustment for the trade takes place when price trades outside of the expiration break even on the upside.
If price violates the upside again, the trade rolls the lower Butterfly up to 2 points below the current SPY price. The rolling process continues on the upside, but the trade should never exceed the maximum loss and commissions should be factored in.
On the downside, I take off the Butterfly and reposition it ATM when price trades to 2 or 3 points above the lower long leg.
The guidelines above are rules that I’ve developed by trading the Migrating Butterfly Strategy.
This post is not a recommendation to take a trade and is provided for educational purposes only. If a trader buys an out of the money binary option for $15 they know that no matter what happens to the underlying they cannot lose more than $15 in the trade. Generally speaking when a trader enters a binary options position they evaluate their reward to risk ratio based on the contract being held to expiration. Futures, options and swaps trading involve risk and may not be appropriate for all investors. Trade Binary OptionsOpen an account with Nadex for free in less than five minutes to start trading binary options today! The maximum risk for any trade is fixed and required in advance so you cannot be called upon for further funds.
Experienced trader John Carter of Simpler Options released a video this morning specifically tailored to traders with goals of growing a small account incrementally into a larger account.
In addition, John always shows his account and how he is directly applying these strategies for himself.
I also used simple option strategies when I was starting to trade higher priced stocks when trading was still a hobby for me in 2004.
Thanks to John for continuing to provide education (in an easy-to-understand, often engaging style) to the trading community. I think you will notice that these trades are on very popular markets that most traders look at on a daily basis. I love trading this product because it has a ton of volume each day and it’s also a fraction of the price of SPX. Back in September we actually had a short trade setup on our Active Swing Trader chart, which had us looking to play a move to the downside (see below).
You start taking some of that capital and putting it to work for you by trading options and after a few months you will have a nice bonus to spend on those other budget items. If a trader buys a binary option for $40 they know that they have a potential upside of $60 and can lose no more than $40. A trader who does not constantly reevaluate their reward to risk setups is doing a bad job of managing their overall risk. But please remember these are volatile instruments and there is a high risk of losing your initial investment on each individual transaction. While this shows a very attractive reward to risk ratio on expiration a trader needs to realize that if they see a move higher in the contract before expiration their reward to risk ratio changes. Now any trader who is long these options has a maximum risk of $80 and maximum reward of $20. Skilled traders are always aware of what this risk is, but even the best traders can forget to consider how their risk changes when a position moves in their favor. This is clearly a much worse setup, when that becomes apparent it is time to exit the trade. This can cause a trader to hold a position too long running the risk of it moving back against them.
Understanding when to exit profitable trades can be difficult for some traders but it is essential to maintaining a disciplined risk management plan.
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