Debit Spread Options Trading Strategy for Small or Large Accounts

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My belief trade options small account that anyone who is interested in options trading should start small and get a feel for how options trading works. Many traders are drawn to options because they offer leverage and the ability to construct market neutral positions. Your goal as a new options trader should be to assume a level of risk in your trades that is boring while you get a feel for how trades work and what fits your personality.

The following list goes through some important concepts a new or aspiring options trader should understand. However, the percentage of account equity at risk will frequently be larger.

That larger percentage at risk makes it extremely important not to take significant losses. Options positions can be constructed that risk a low dollar amount per trade, but dollars at risk is just a starting point for managing risk. However, most options traders do not trade in a way that allows positions to reach the maximum loss.

Positions are frequently managed so that the maximum loss and target gain differ from the risk graph. The challenge with giving a one size fits all number for the maximum percentage at risk per trade is that the number depends on your percentage gains and your winning trade percentage. The Theta Trend system document has a chapter on Expectancy that goes into risk and position sizing in more detail. Suppose you set up a dollar based maximum loss for a new options position and know what that means as a percentage of account equity.

The next step in trading an options position is understanding what changes will bring about that loss. If price only needs to move a small amount to hit your target loss, you are probably assuming too much risk. Options traders are always watching volatility because it impact their positions. Using time trade options small account and longer dated options will increase the significance of volatility. Diversification across markets, trade options small account cycles, and strategies are all ways to reduce risk.

In a small account, diversification becomes more challenging because the margin for trades will take up a larger percentage of account equity.

The Butterfly is one of a few options strategies that works well in a small account. If price trades higher, a second Butterfly can be purchased to stretch out the expiration break even lines. If prices trades higher again, the first Butterfly can be rolled up.

The goal of the strategy is to keep the market trapped under the expiration break even lines without taking too large of a loss. The benefit of trading the strategy is that the position will generally make money on trade options small account downside due to skew. Many traders like to initiate high probability Iron Condors by selling deep out of the money options. Trade options small account trades make money a high trade options small account of the time, but sometimes require adjustments to keep risk under control.

A little more information on Iron Condors can be found here. Weekly options provide the opportunity to make quite a few trades every month.

However, Weekly Options have some additional risks that make them more dangerous for a small account. Positive Theta Weekly Options positions frequently carry high directional risk think gamma that can potentially destroy a small account. Suppose you sell a 5 point trade options small account, 10 delta SPX vertical with a week to expiration. That vertical will likely be sold for around a. The problem with that type of a trade options small account is that even though trade options small account might want to close the position for less than the maximum loss a gap against the position can lead to a larger than planned loss.

As a result, a smaller amount of capital should be allocated to strategies that use Weekly Options and that can be challenging or impossible with a small account. Additional information on trading Weekly Options can be found herehereand here.

There are both positive and negative Theta ways to trade options directionally. Positive Theta directional trading allows options traders a way to be only partially right or even wrong on direction and still come out ahead. The vertical spread allows options traders a way to directionally trade a market without the need to be completely correct on direction. The trade will make money if the market moves up, stays about the same, or even goes down slightly.

The trade will make money as long as price remains above the short strike at expiration. Download the Theta Trend Document for a good overview on positive Theta, directional options trading here. The reality of trading options with a small account is that commissions can reduce returns and become a significant factor in your trading. Feel free to post any questions you have in the comments below and thanks for reading. What is planned capital in this context?

Say for example that we sell a 10 point wide SPX vertical spread for a 1. In that case, the maximum trade options small account is 9. If our planned capital for the trade was 10k, we could theoretically sell 11 spreads and stay within planned capital.

One thing to keep in mind is that planned capital is different from the desired loss. In the vast majority of cases, the loss point should be much less than planned capital. Obviously we could wake up with the market at zero and that might trade options small account be possible, but generally speaking the loss trade options small account be much less than planned capital.

I only buy puts and calls with at least 2 month expiration. Understand Your Loss In Terms of the Position Suppose you set up a dollar based maximum loss for trade options small account new options position and know what that means as a percentage of account equity.

Volatility Options traders are always watching volatility because it impact their positions. Anticipate Capital Trade options small account and Adjustment Money Diversification across markets, expiration cycles, and strategies are all ways to reduce risk.

Weekly Options Weekly options provide the opportunity to make quite a few trades every month. Hi — it does help, thanks!

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The following online brokers are those that we believe to be the best choices for beginner options traders and traders using small amounts of capital.

We have based these recommendations on a combination of research and experience and we strongly suggest you consider using one of these brokers listed below. Choosing a suitable online broker when you are relatively new to options trading is somewhat of a different process to choosing a broker when you have plenty of relevant experience.

Equally, choosing a broker to use when you are planning on only making small trades is different to choosing a broker if you are planning on making larger trades. While we recognize that not all beginners will be small traders, and not all small traders will be beginners, we believe that there are certain brokers that are particularly suitable for traders that fall into either of these categories.

This is because many of the factors that need to be considered are the same. As well as our recommendations for suitable brokers listed above, we have also provided some information on which factors you should be taking into account when deciding which broker to use. Options traders all have slightly different sets of circumstances and slightly different requirements and ultimately a lot is down to personal choice.

A broker that is a good choice for one trader may not necessarily be a good choice for another trader. As such, we would never recommend just one single broker to a broad audience, but would rather provide our readers with a range of suggestions and offer advice on how to select the most suitable. This is why we have classified our recommendations into a number of different categories.

When choosing a broker you need to think carefully about which aspects of a broker you need to be taking into consideration. For beginners and those looking to make relatively small trades, we believe that the following factors are particularly important and it's these that we suggest you look carefully at when deciding which online options broker to select. Traditionally, brokers could easily be placed in one of two categories; they were either full service or discount.

The advent of online brokers has made it somewhat more difficult to distinguish between the two as there tends to be a lot more flexibility in the services offered. Strictly speaking, a full service broker is one that will provide you with professional advice and guidance in addition to transacting your orders for you while a discount broker will simply carry out your orders as instructed. For more details on this particular aspect of brokers, please visit Full Service Brokers vs.

These days a number of brokers can effectively be placed in either, or both, of the categories as they offer a choice of service to their customers.

What you must decide is whether you want the additional services that are on offer, such as receiving expert advice on potential trades and investments, or whether you prefer to have a broker that simply acts upon your instructions. It won't surprise you to know that using the additional services is the more expensive option, and you will pay much less in commissions and fees when using discount services. There's an idea floating around that suggests beginners are better off using a full service broker while they are still learning and benefitting from having a professional guide them as necessary.

There are certainly benefits in that course of action, however we suggest that even beginner options traders should use a discount service. If a different form of investment was involved, such as investing in stocks and shares using a buy and hold strategy, then the arguments for using a full service broker would be stronger because there are real benefits in having an expert help you to plan your investments, find suitable investment opportunities, and monitor your portfolio.

However, options trading is a unique form of trading and there is so much more involved than simply selecting stocks that are going to go up in value in the long term. In our opinion, it's much better to be hands on from the very beginning, learning how to identify your own trading opportunities, and decide which options trading strategies to use.

As such, we would advise beginner traders to stick to discount services primarily for the reasons listed above, but also because of the additional costs involved in using a full service broker. The higher commission charges can really eat into any returns that you make, particularly if you are making fairly small trades, which can make it very difficult to be profitable in the long run. This is also why discount services are better for small traders, whether beginners or not, as the extra costs effectively have a bigger impact when trade values are low.

The commissions and fees charged by an online broker are, somewhat obviously, something that any type of options trader needs to take into consideration. It's particularly important for small traders to use a broker with competitive commission because as we have touched on above; high commissions can be a real problem when making low value trades. Bearing in mind that most beginners will typically start out with fairly low value trades too.

Beginners options traders also should be looking to keep commission charges as low as possible. You should also be looking for commission and fee structures that are nice and straightforward. Some places have structures that are really convoluted, and this is an added complication that you simply don't need. You need to be aware that a number of options brokers will offer really low headline commission rates, but then have small print stipulating that certain criteria has to be met to get the low rates.

Alternatively, they might offer low commissions but then have a load of other fees that get charged to your account. This is something else that beginner traders and small traders really need to look at before signing up with an online service. Most places will have fixed minimums for how much you need to deposit and how much each trade must be worth. The minimum amounts can vary quite significantly from one broker to another, and you obviously need to make sure that the figures are suitable for you.

Clearly, if you are making small trades you won't want to deposit huge amounts at any one time so you should look for a broker with a relatively low minimum deposit. Equally, you will need a broker that has fairly low minimum trade values to ensure that you can make your trades at a level you are comfortable with.

The single most important thing to remember when choosing an online broker is that you should be using a broker that is suitable to you and your requirements. It really is worth spending some time doing your own research and checking out exactly what is on offer because the last thing you want to be doing is constantly changing your broker because things are not working out.

We strongly suggest that you take on board the advice we have offered above and also stick to those online options brokers that we have recommended. Best Broker for Beginners The following online brokers are those that we believe to be the best choices for beginner options traders and traders using small amounts of capital. Offering 90 days free trade commission Training area for learning the basics of Forex Trade with over 50 currency pairs.

Ideal for traders trying to keep costs low Platform is easy to use but gets things right "Trader Network" helps build a community. Best Option Brokers By Category. Factors To Consider When choosing a broker you need to think carefully about which aspects of a broker you need to be taking into consideration. Full Service or Discount? Summary The single most important thing to remember when choosing an online broker is that you should be using a broker that is suitable to you and your requirements.