Rising Star Teaches Me How to Trade Options with a Small Account | Rolling Trades Series
May 12, 2021
Ever hear the phrase, “Champagne wishes on a beer budget”? I feel like that sometimes when I click on Tom’s trades on the tastyworks follow page and see how much buying power they use. I had a good chortle once when I wanted to see if I could replicate one of Tom’s crazy 5x9 ratio spreads in a high priced stock that had buying power that was more than my mortgage. Okay not quite but close. But what about “good things come in small packages”? This week’s episode is all about maximizing smaller accounts. We’re here, we’re small, get used to it!
Jamie R is one of our phenomenal rising stars, and he’s super relatable because he trades with a comparably smaller account (10k - 20k) than some of our other featured stars. He’s been trading in good times and in bad, and I was happy that he shared his small account tips with me.
How much money do you need to trade options for a portfolio or a position? Jamie doesn’t like to allocate more than 5%-7% of his net liquidating value on a single trade. Using this as a baseline has kept him from getting too big, too fast. He also likes to keep his position size at around 1% of net liquidating value if he’s trading a binary event such as an earnings trade. His rules don’t have to be your rules, but you should be consistent when setting up your trades. I will admit I struggle with this, and more likely will just YOLO a trade if I like how it sets up. But mechanics matter!
When the market shows you how it wants to act, believe it! Are you trading something with hyper-inflated IVR (like GME this year)? Then make sure you grasp what that potential move to the upside or downside could mean for your position.
If there are market trends that are leading to good liquidity, double sided trading and some decent opportunities to sell premium, then hop on in, the water is fine. But don’t forget rules one and two. Stay small and be mindful of volatility. But hopping into hot sectors like: EV’s, cannabis, or crypto can be done no matter what your account size.
Defined risk trades can be a small account holder's best friend. It’s been great learning new defined risk plays that go beyond credit/debit spreads and iron condors. I learned the hard way that even a single contract in a low priced stock ($GME when it was $16) can totally take a huge chunk from your small account in the blink of an eye. Yeah, if I had a time machine I would have done something defined in GameStop for sure.
Hey, sometimes the stock wins. Jamie suggests flattening out your positions and taking a week off from staring at the screen and pulling your hair out. Then come back to your positions with a new focus and a fresh perspective.
This is one way I learned to not only get some short delta in your account but to learn about market moves for not a lot of money. We discussed doing a cheap butterfly in IWM.
Try a low-priced options trade like this when the market is up. Indices are great opportunities for this strategy. Get a feel for where the stock has been and where it seems to be going. The market likes to revert back to the mean.
Sell short strikes at the price it seems to revert to, then buy wings $5- $10 wide depending on account size target that price and if the market pulls back within that 14 day time frame you pay a dollar for a ten dollar wide butterfly, and possibly net 9 bucks.
In this episode, I could’ve done an IWM butterfly for 54 cents! Definitely not dumping all of your money into trades like this, but again a cheap shot that adds some short delta.
An Iron Fly is similar to a butterfly where you’re selling 2 strikes and buying two wings, but instead of just being all on the put side or the call side, it’s a combination. Your short strikes are both a put and a call, so basically a straddle and then you’re buying the wings. TW platform has a dashed line to show you where the expected move is and you can even use the drop down menu, like I do to initiate the straddle:
Then you buy equidistant wings, which in the case of TLRY we went $7 out. Play around with the strikes to see how much premium you can collect. But it's a great risk defined strategy not only for earnings but for smaller accounts any time.
Hope you guys enjoyed this episode! Let us know in the comments what some of your favorite tips and tricks are for smaller accounts. See you guys next week for another episode of Rolling Trades!
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
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