Updated: Dec 25, 2022
Option trading with a small account size is absolutely possible. All the admins at GKT have at least one account that is small. When you trade with a small account it's important to realize some trading strategies, some possibilities will be unavailable until you grow your account, but these 'limitations' are not a reason to not trade options. It's important to start somewhere and there is no need to wait!
If you live the US and your account is under $25,000 understand the rules for Pattern Day Trading (PDT). There are restrictions on the number of times you can open and close a position in the same day. Most of the strategies we discuss at GKT aren't day trades so this is not a major obstacle, but still important to understand. Margin accounts aren't available with most brokers until you have a balance of $2,000. You can still make trades if your balance is under $2,000 but focus on risk defined and small trades! Learn these rules and understand them, you do not want any surprises from your broker including Violations or Margin Calls!
A scary sounding warning before we get into the details of trading with a small account: You should only trade with money you can afford to lose (don't borrow from credit cards, you should not use your last few dollars of savings to trade the stock market). If you have a solid trade plan, good knowledge and understanding it's unlikely you will lose all your money, but there are outside factors you cannot control that could make all statistics and probabilities not matter, and although it's a low chance it still is there!
Below are some factors to consider when options trading. These actually works for all size accounts (as account size grows you do more trades).
Look for high probability trades, and trade often: the biggest issue most of us face is not enough occurrences. We have been trained and conditioned to wait for the "perfect" time. The more frequent you put on trades the better the probabilities work in your favor when you are making trades with high Probability Of Profit (POP). It sounds like its more risky, but not trading with enough frequency is is a major factor to your trading success.
Don't force trades: trading often is important, but don’t put on trades where there is not enough premium. If there isn't enough volatility you could have positions that don't match what you really want. We want to trade often, but we also don't want to put on bad trades and have to deal with managing positions we shouldn't have setup!
Trade small: trade with consistent risk size. If a trade looks to good it probably is. Understand that incorrectly sized risk for a trade can erase all of your winning trades if you trade too big and it goes against you (which is normally does).
Diversify trading strategies: We get caught up in the thought this worked for me last time it has to work again. GKT is a big proponent of using different strategies depending on market conditions. Do not stick to strategies just based on previous results, always look to diversify!
Trading during binary events: Have a plan for trading around earnings or any binary event. Recognize that theta decay slows 2 weeks before earnings. You can't always plan for all news events, but FOMC decisions, CPI announcements (at least starting in 2022) are known events and market awareness is important!
Choose the correct Days to Expiration (DTE): Option trading is often times duration over direction. Make sure you choose the right timeframe for your trades. Don't sell weekly options if there is little to no premium. Options don't always trade like shares of stock, if you are trying to get a direction give yourself more time!
Exiting positions: A good trading plan has a defined exit strategy, exiting a trade is more important than entering the trade. Have a plan before you enter a trade. Actively taking profits and manage your losses before they become unmanageable is smart. Options need liquidity so you sell when others want to buy, take the money when you can, not when you have to! Remember, you do not have to sell at the very top or buy at the very bottom! If you get a move in your direction there is nothing wrong with taking profits as long as you also manage your losers. Do not allow a winner to turn into a loser. If an assumption changes, if your trade hypothesis changes, you should exit your position.
Trading in a community of likeminded people is far more fun, educational, and profitable! Join our discord today: www.goodkidstrading.com/join