Mastering the Art of Options Trading: Tips for Small Accounts

I experimented with various strategies that mainly involved long options, which would eventually depreciate and eat away at my capital.

How to start trading a small account

Starting to trade options with a small account can be a daunting task. I remember spending long hours at work thinking about how I was going to make a living trading, but I only had less than $5,000. Achieving my goal felt impossible, but I didn't have any other viable alternatives. I did not want to work until I was 80 which was my current path as I lived paycheck to paycheck and had credit card debt. I did not want to lower my expenses and live a minimalistic lifestyle, as my wife and I wanted to start a family. Starting a business was another option, but I enjoyed my job, which paid well and offered a flexible schedule. Besides, it was a family business, and I might run it one day, but that was too far into the future.

So, I decided to keep learning about options trading. I remember spending countless nights sitting at my desk, studying options until I fell asleep. I refused to settle for a mundane 9-5 job and retire at 65 with a regular income. I knew that if I could master options trading, I could create not just money but time. My ultimate goal was to be able to do what I wanted, when I wanted.

Through my experiences, I learned that until I could get my account to a higher level like $30,000 it's acceptable to take on higher risk. I could be long options as long as I had a way to finance them and hedge against potential losses. I aimed to maintain a good win rate and ensure that my winning trades were larger than my losing trades. In my search for an effective strategy, I scoured the internet and experimented with various ideas.

Strategies for small accounts

One day, I stumbled upon earnings-type strategies and was intrigued by the predictable upcoming events where options prices would depreciate differently than usual. This inspired me to delve deeper into the dynamics of option prices during earnings and consider the possibility of buying options before the event and selling them before the price depreciation occurred. After conducting thorough back tests and analyzing the data, I found a consistent way to exploit this edge and implement it in my real account. 

There are many strategies and techniques that traders can use to improve their chances of success, and one of them is to focus on maintaining a higher than 50%-win rate while maintaining larger winners than losers.

The key to success with this approach is to ensure that your winning trades are larger than your losing trades. This means that when you do experience losses, they are kept to a minimum, and when you do win, you maximize your profits.

Another important factor to consider is the ability to take advantage of surprise moves in the market. Many trading systems fail when unexpected events or sudden market moves occur because they are not designed to handle such situations. However, with a system that has an asymmetric reward structure, you can capitalize on these opportunities and potentially generate significant profits.

One way to implement this type of system is by using options trading strategies that allow you to benefit from sudden market moves while limiting your downside risk. For example, you could use a long straddle or a long strangle strategy, which involves buying both a call and a put option.One thing I do is go long a strangle for a discount in order to move the probabilities up.

When an unexpected event occurs and the market experiences a sharp move in one direction, one of the options will likely expire worthless, but the other will generate a significant profit. This allows you to benefit from the surprise move while limiting your potential losses.
 

Useful tips for small accounts

Here are some thing I look for when trading a small account:

1. Risk management: Managing risk is essential when trading a small account. Avoid taking large positions that can wipe out your account in case of losses.
    
2. Liquidity: Always look for highly liquid options to avoid being trapped in positions.
    
3. Options strategies: Opt for options strategies that offer a limited downside risk and an asymmetrical reward profile.
    
4. Win rate: Aim for a high win rate, ideally over 50%, to ensure consistent profits over time.
    
5. Position sizing: Properly size your positions based on your account size to minimize risk and maximize returns.
    
6. Timing: Consider the timing of events such as earnings releases, as they can provide opportunities for profitable trades.
    
7. Market conditions: Keep an eye on market conditions and avoid trading during periods of high volatility or uncertainty.
    
8. Patience: Be patient and wait for high-probability trading opportunities to come along. Avoid forcing trades just to make something happen.

It is important to note that the method I use to grow my small account is not the only approach that can yield success. However, since January 2022, I have implemented a proven strategy that has yielded positive results. Therefore, I recommend using similar principles to those that I have deployed. The following numbers from my real account serve as evidence that these principles can work.

Since January 2022, I have successfully turned $5,000 into $9,200 by utilizing this earnings-based strategy with a good win rate of over 50% and asymmetric returns. This strategy like many other small account strategies comes with higher-than-normal risk as my account has drawn down from peak to trough over 46% since inception in January 2022.

Bottom Line

Growing a small trading account with options requires discipline, proper planning, and risk management. It is essential to focus on strategies that offer limited downside risk and an asymmetrical reward profile, maintain a high win rate, properly size your positions, and be patient. By following these guidelines, traders can achieve their goals and grow their small trading account with options.

About the Author: Karl Domm's 29+ years in options trading showcases his ability to trade for a living with a proven track record. His journey began as a retail trader, and after struggling for 23 years, he finally achieved 
consistent profitability in 2017 through his own options-only portfolio using quantitative trading strategies.

After he built a proven trading track record, he accepted outside investors. His book, "A Portfolio for All Markets," focuses on option portfolio investing. He earned a BS Degree from Fresno State and currently resides in Clovis, California. You can follow him on YouTube and visit his website real-pl for more insights.