Trade options small account
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. 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 spreads and longer dated options will increase the significance of volatility. Diversification across markets, expiration 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 the downside due to skew. Many traders like to initiate high probability Iron Condors by selling deep out of the money options.
The trades make money a high percentage 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 wide, 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 position is that even though you 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 here , here , and here. There are both positive and negative Theta ways to trade options directionally.