How to Trade a Small Options Account Like a Pro - Tradersfly (2024)

We’re going to take a look at how to trade options when you have a small account like a professional.

The one key thing that we’re going to focus on is really about risk management.

I find a lot of people with small accounts just don’t understand the risk management aspect of trading.

They really just put a lot of money in a single spot even though they may think they don’t.

If you learn to manage risk the rest will fall into play.

If we look at breaking down a simple vertical, what I commonly find is that most average traders don’t understand how to diversify.

People say they are diversifying by spreading the risk and let’s just say Facebook, Apple or maybe Netflix so they’re starting to diversify this way.

But what they do is, let’s look at the screen,

Let’s say we’ve got square so this is square this is a position.

We’ll have this position looking at 406 dollars of position to be able to make about 94 dollars.

Now, this is October 29^th, today is October 6^th so if we look at the duration this is about 23 days out.

So now if we look at this what happens is a lot of beginners we’ll say I got 406 dollars at risk so what I’m gonna do is I can put in maybe a couple thousand dollars into the trade.

Now, they’ll start stacking that risk and contract number and they say okay I’m gonna sell some put verticals and maybe I’ll go and could do about 12 because I’ve got a 5,000 account and now I’ve got 4,800 on it.

Maybe you got a 20,000 account but you say I’ll put in 5,000 in this one 5,000 and another one 5,000 another one and another 5,000 and another one and I’ll get you 20 and you think you’re diversified.

However, you can diversify much more than just this.

I’m going to show you an example and concept about diversification called risk arrays.

In the screen if we look at diversifying the risk I’m putting all my concentration of capital, all my risk at basically the 220.

Why don’t I spread this stuff out at different points?

Let’s modify the risk.

So let me do two contracts and just watch how we can get to 5,000 of capital in the same way.

I’ll start duplicating few times for you and I’ll do some contracts on November and I’m gonna start spreading that risk out and I’ll do some more contracts here on November 12^th.

Now, I’ve got a couple contracts here and there and I will change my expiration date where all my risk is starting to be a little more spread out.

Now, we’ll do October 22^nd and we’ll go maybe the 225, 220 we’ll do something like this.

If you take a look at this risk picture, if you’re into selling verticals and you like selling verticals the difference is normally a normal person’s account would be; I’m going to put at the 210, 215 I’m going to put in my 5,000 right there.

Here what we’ve done is we’ve taken a bit of cash put it at this strike which is the 225.

We’ve taken some capital here at the 220 some at the 210 and some at the 200.

So all these points we basically spread our capital out rather than at a single spot.

When we do have a problem at this area only maybe part of my position gets in trouble the other part could actually be a lot safer.

They might be totally okay rather than putting everything in one spot.

You could see the big advantage here and the big issue is that many people would think that if they put it all in one spot they have a problem.

You could continue to stack this even this doesn’t add up to about 5,000 but what you could do is slowly spread out your capital until you reach about that 5,000 or so.

We could make a bit of money not as much as if we did shorter duration if we’re just selling put verticals but it gives you an idea and concept of how to spread the risk out.

Thinking like a professional and even if you only have a ten thousand dollar account or five thousand dollar account learning to spread out your capital is a wise approach.

If i did Starbucks I could do maybe a two-point wide put vertical something very simple and now I’m just putting up a hundred and sixty five dollars of capital.

It’s a lot less money than just doing maybe a four hundred dollar stock but this allows you to now spread our money out.

You’re able to spread it out, you could just do one contract but find something where you could spread out that cash at different points and zones and that’s where you get into thinking like a professional.

Doing it on a smaller account level is actually more difficult because it’s tougher to spread out a smaller amount of sum because you’re kind of limited to the stocks.

The point is if you learn to spread your risk at different points at different areas you’ll be better off and that’s how you start thinking a lot more like a professional trader and how you grow a small account because you’re spreading your money in different spots.