Okay, traders with small accounts often assume that trading options is out of their reach. Out of their reach because they lack the proper amount of capital. But that's not true at all. We've trained lots of traders over the years at SME Training with accounts as small as a few hundred dollars.
And there are plenty of options trading techniques for accounts as small as a thousand dollars. In this video, we'll teach you three strategies that you can trade even if you have as little as $1,000 in your trading account. So if that's you, stick around because these strategies, these trading strategies potentially can help you grow your trading account.
Hi, I'm Seth Freuberger. I'm the head trader of SMB Capital's Options Trading Desk here in Manhattan. And we work with traders and investors from all over the world, some of whom trade for us here at SMB Capital and others who are aspiring traders who might someday qualify for a seat on our trading desk.
And one of the most common questions I get are from traders who are interested in trading options strategies, but they have a very limited account size and small as, say, $1,000 in some cases. and they just don't know if they have enough capital to trade option strategies given their account size. And the good news is that option strategies are actually very capital efficient in many cases, and so as a result it's entirely possible to start trading options with a small account. The purpose of this video is to share three of those strategies with you to give you a feel for how flexible options can be in terms of capital utilization.
And In order to explain how these strategies work, we need to make sure that you understand how stock and index options work. Now, if you're new to options trading and don't know what stock and index options are or how they work exactly, we've created a video for you to understand options basics. And if you click the video appearing on your screen right now, it will lay out the groundwork for understanding the strategies we're going to be teaching you in this video.
So when you're finished, you can come back and watch the rest of this video. The first strategy we'd like to share with you is what is known as the iron condor and it's very easy to understand and implement. So let's give you an example of how this works.
So almost everyone is familiar with SPY which is the ETF that represents the S&P 500 and so on Monday of this past week, August 28th, the SPY opened at $442.24 And so let's say that we pulled up an options chain that expires that same day, August 28th, which means that the trade has no overnight risk because the options expire that day. And so the trade will be fully resolved by, at the latest, the end of that same day. And so let's say that at the open, you went ahead and sold 10 of the 445 calls for 25 cents and 10 of the 441 puts for 43 cents.
And... At the same time for protection, you went ahead and bought 10 of the 446 calls for 11 cents and 10 of the 440 puts for 27 cents. Well, when you do that, selling calls above the stock's price and selling puts below the stock's price and surrounding the calls and puts that you've sold with long calls and puts farther away from the market, that entire combination is what options traders refer to as an iron condor. Now the cash flow of this transaction works like this and so starting with the 10 calls we sold at 445 You can see that we sold them for 25 cents But remember each options contract represents 100 shares of SPY And so you multiply that by a hundred and we sold 10 of them resulting in total cash inflow of $250 for those calls and using the same logic we collected $430 for the puts we sold and paid $110 for the call protection and $270 for the put protection, resulting in an overall positive cash flow for the iron condor of $300, for which your broker would only require you to have $700 in your account because that's the worst case scenario loss on the trade. So even if you had $1,000 in your account, you could afford to execute this trade.
Now, Moving to the end of the day, the SPY closed at $442.76. And so let's take a look at what that means for our trade, because remember, every one of those options expires at the end of that day. And so we can assign a value to each one of them.
And in this case, that's going to be really easy because they each expire worthless. Why? Well, let's think about it. You see, the short calls we sold at $4.45, well, those expired above the closing price of SPY, which means that they have zero value because no one's going to exercise his right to buy SPY shares at $4.45 when the stock closed well below that price. And so those call options expire worthless, as do the $4.46 long calls we bought for the same reason.
Calls that expire above the stock's price have no value. Now, moving down to the puts, you can see that the short puts we sold at $4.41 as well as the long puts we bought at $4.40, both those expire worthless also because if a stock is trading above the strike price of a put option, there's no value to the right to sell your shares below that value because you'd be crazy if you did that. So those expire worthless also, meaning that the only value left is the $300 you got at the beginning of the trading day.
entering into the iron condor in the first place. And so you just go ahead and pocket that premium as your trade profit. And so even only using a part of your $1,000 account, you could earn $300, which would increase your account size by 30% in a day, which is pretty impressive if you think about it. Okay, now that you can see that iron condors are entirely possible to trade in a small account, let's move to the next trade that you can easily trade. within a small account, and that is known as a debit spread.
So let's just jump right into an example so you can understand exactly how debit spreads work. So let's head back to June 1st of last year. And as you can see, as with most tech stocks last year, Microsoft had taken a pretty big beating because tech stocks get sold off when interest rates increase due to the way that they're valued by investors.
And so by June 1st, the stock had already lost 20% of its value. And so let's say that you were bullish on Microsoft, figuring that once this sell-off was over, the stock was bound to bounce and get back over 300, but you only have a $1,000 account. Well, to buy 100 shares of Microsoft at the close on that day at 272.42 is out of the question because that would cost you $27,420.
But what if instead you went ahead and pulled up an options chain that expired a year later in June of 2023. And so you went ahead and bought the $2.95 Microsoft call, about 23 points above Microsoft's current price for $26.33. And you simultaneously sold the $3.20 calls expiring that same day for $16.78. Well, when you do that, you are executing what options traders refer to as a call debit spread. where you buy a call because you're bullish, but then higher up that same options chain, you sell a call to cut down the cost of your bullish trade substantially. And I say the cost is cut down substantially because the cost of the 295 call, as you can see, is $26.33, and it represents 100 shares of stock.
So you multiply that by 100, resulting in a cost of $2,633 for that call option, which you can't afford because your account's only $1,000. But because we sell the $320 call simultaneously, we receive back $1,677 for selling that, which causes the trade total cost to drop below $1,000 in your account down to $9.56. In other words, you can get the benefit of buying a call option, which represents the right to buy 100 shares for $295. By selling a call 25 points higher, bringing your net cost down to $9.56, which cuts the cost down by more than 60% and allows you to participate in the rally of Microsoft that you're expecting without having to come up with over $27,000 to actually buy 100 shares of the stock that day. And so now moving to the day before these options expire on June 16th of 2023, you can see that you were right.
And Microsoft had, in fact, rallied with the artificial intelligence craze that's captured the market this year in 2023. And so by that date, Microsoft had rallied to $348.10. And so let's take a look at how our trade is doing. And as you can see, the $295 calls are now worth $53.25 and the $320 calls are worth $28.22.
So let's first figure out why that is. And as you can see. The 295 call gives you the right to buy Microsoft shares at 295 per share while you can immediately sell them.
for $348.10. So that means that each option is really worth $53.10 if you were to exercise that option that day. And so it's no wonder that the option is trading for almost exactly that $53.25.
And similarly, the $320 call you sold, well, the owner of that one has the right to buy Microsoft shares at $320 and sell them immediately for $348.10, meaning that they have a value of $28.10 and therefore... it's trading for almost exactly the value that it brings to the owner of that 320 call you sold. And so pulling it all together, if you decided to close the trade that day before the options expire, what you would do is to sell the long call you own at 295, receiving $5,324, and you can see from the calculation that in turn you would buy back the short call you sold at 320, and as you can see That cost $2,823.
And of course, you would have to deduct the original cost of the debit spread, which was $956, for a final profit of $1,546, which would have pushed the value of your $1,000 account up to $2,546 in one year, which is a massive annual return. So we've learned about iron condors and debit spreads and how both are ways to profit from options using a $1,000 account. And so the final option strategy that you can easily execute with a $1,000 options account is the outright buying of what options traders refer to as leap options.
And a leap option is very easy to understand because a leap is nothing more than a call or a put that expires far into the future, often a year or more. In fact, when a leap option is first listed on the exchange as a leap option, it must expire at least 12 months later. Why are leap options important to traders who are trading with a small account of $1,000 or so?
Well, let me give you an example. Let's head back to January 20th of last year when H&R Block, which trades under the ticker symbol HRB, had been selling off over the past several months and closed that day at $21.58. And suppose that a trader had done some fundamental analysis of HRB.
and for some reason concluded that the stock was now undervalued. So he became bullish with a view that over the next year, the stock would bounce. And so one thing he could conceivably do to express that bullish bias is to buy 100 shares of HRB, which would cost $2,158, as you can see. But suppose you only have $1,000 in your account.
How could you address that? Well, here's a way. Instead of buying 100 shares of HRB, which he can't do anyway because of his capital constraint, instead, he pulls up an options chain expiring a year later on January 20th, 2023, which would be regarded as a leap options chain. And he went ahead and bought a call at a strike price of 15, which is actually a price very far below the current price of 21.58 and is therefore considered what options traders call a deep in the money. call option because of how far below the current price its strike price is.
And so you can see the price for that call is $6.90. And so if you do the math, you'll see that the cost of that call option is a cash outlay of $690, which is less than one-third of the price of buying 100 shares outright of HRB. Okay, so now let's move forward to the day before this call option expires, which is exactly a year later. As you can see, after a strong rally and a bit of a pullback, HRB found itself priced at $37.25 a year later, a significant price increase from HRB's price on the day the options trade was entered into a year earlier.
And so now let's take a look at the value of our HRB call at that 15 strike price. And as you can see, it has appreciated substantially to $22.90. Why is it priced at $22.90? Well, think about it. HRB is trading at $37.25.
So if he exercised his option that day and bought the shares for $15 and then immediately sold them, he'd make a profit of $22.25 per share. And so you can see why the options priced at $22.90 because near expiration, every in-the-money call option will be roughly priced around the profit you'd receive if you exercise the call, bought the shares at the strike price, and sold the shares immediately. And so now if he decides to sell the call option the day before it expired, here's how the trade would have turned out.
And so as you can see, he receives $2,290 from selling the call option and deducting its $690 cost. The result is a profit of $1,600, which is a return of over 230% on the original risk in the trade. And moreover, the trader's account has now risen to $2,600 compared to the $1,000 original value.
And there's something else that's really important to understand. Suppose that the trader did have enough money to buy the shares, and suppose that he did that and then sold them the same day we just sold the call. and made that $1,600 profit.
Well, if he did that, with HRB trading at $37.25, he would have received proceeds of $3,725, less the cost of $2,158, which would have yielded a gain of $1,567. Actually, a little bit less than he would have made on the call transaction. In other words, he put up more money, took on more risk, and ended up with a lower result.
And so if you think about it... buying a deep in the money call can yield even more than a simple stock transaction for way less cash and way less risk and thus within the reach of folks who are starting out with small accounts. And so what I'd like you to take away from today's video is that you absolutely can trade options with a small account.
In fact, options really provide traders with a small account the opportunity to participate in very large stock moves at a fraction of the cost and risk of outright buying 100 shares of the stock that you're interested in. And just so you know, it's not just small account holders who use options to cut their cost and the risk of their trades. Believe me, professional options traders take advantage of this very efficient use of capital constantly, which gives them less risk and extra capital to make other trades. and lots of other benefits.
The efficiency of options trading helps account holders, large and small, to make greater returns with less risk. Okay, if you've liked the three strategies that we just taught you in this video for trading a small account, then you're gonna be particularly intrigued by the simple option strategy that we teach you in this next video. Just click the video appearing on your screen right now.