If you're trading with a small account and ready to take your options trading to the next level this blog post is for you. I'm discussing specific strategies and trading plans tailored to small accounts, while embracing the Good Kids Trading (GKT) principles of trading small, trading often, and trading mechanically. Our discord community is a great place to learn more, join today, it's free! Let's explore some approaches to help you grow your small account and thrive in the world of math-based options trading.
When trading with a small account, it's essential to focus mainly on risk-defined strategies that limit your potential losses. By capping your potential downside, you protect your account and ensure that you can bounce back from a losing trade. Yes, you are also not going to make as much profit as you would with undefined risks trades, but GKT stresses the importance of risk management! Ensure that your position sizing aligns with your risk tolerance and account size, and always use stop-loss orders or understand the max loss before entering the trade!
One of the most effective strategies for small account traders is vertical spreads. By simultaneously buying and selling options with different strike prices, but the same expiration date, you can limit your risk while still having the potential for profit. Vertical spreads, such as bull put spreads and bear call spreads, allow you to trade directionally while keeping your capital requirements low.
Trading Plan: Identify an underlying stock with a clear directional bias. At GKT Sell an out-of-the-money (OTM) put option while simultaneously buying a further OTM put option for a bull put spread, or sell an OTM call option while buying a further OTM call option for a bear call spread. Monitor your position and adjust as needed to maintain your risk profile.
Iron condors are a popular strategy for small account traders looking to profit from range-bound markets. This neutral strategy involves selling an OTM call and put option while simultaneously buying further OTM call and put options. The goal is for the underlying stock to remain between the short call and put strike prices, allowing you to collect the premium from both sides.
Trading Plan: Identify a stock with low implied volatility and little expected price movement. Sell an OTM call and put option, then buy further OTM call and put options to define your risk. Monitor the position and adjust as needed to maintain a neutral stance.
Calendar spreads involve selling a near-term option while simultaneously buying a longer-term option with the same strike price. This strategy takes advantage of time decay, with the goal of profiting from the faster decay of the near-term option.
Trading Plan: Choose a stock with a stable price outlook and identify a strike price close to the current trading price. Sell a near-term option and buy a longer-term option with the same strike price. Monitor the position for changes in implied volatility and price movement, adjusting as needed.
For small account traders who own stock, covered calls can be an excellent strategy for generating additional income. By selling a call option against your existing stock position, you collect premium income while agreeing to sell your stock at the strike price if the option is exercised.
Trading Plan: Identify a stock in your portfolio with limited upside potential. Sell a call option with a strike price above the current trading price and an expiration date that aligns with your outlook. Monitor the position for changes in price movement and consider rolling the call option if necessary.
Cash-secured puts involve selling a put option and setting aside the cash needed to purchase the stock if the option is exercised. This strategy can generate income and potentially acquire stocks at a lower cost basis.
Trading Plan: Identify a stock you're interested in owning at a lower price. Sell an OTM put option and set aside the cash needed to purchase the stock if the option is exercised. Monitor the position and consider rolling the put option if necessary.
Scaling into Trades
Scaling into trades is a technique that involves gradually building a position by entering multiple smaller trades instead of a single large trade. This approach allows you to manage risk and improve your average entry price, especially during volatile market conditions.
Trading Plan: Identify a stock or options position that you want to establish. Instead of entering the entire position at once, divide your capital into smaller portions and enter multiple trades at different price levels. Monitor the overall position and continue scaling in as the market moves in your favor or provides more favorable entry points.
By combining these strategies with the core GKT principles of trading small, trading often, and trading mechanically, you can effectively grow your small account and navigate the world of math-based options trading. Remember, the key to long-term success is staying disciplined, managing risk, and continuously learning from your experiences. And don't forget, joining the GKT Discord community can provide invaluable support and guidance as you embark on your trading journey. Join us today – we can't wait to see you succeed!