How to day trade options with a small account
In the vast majority of cases, the loss point should be much less than planned capital. The vertical spread allows options traders a way to directionally trade a market without the need to be completely correct on direction. What is planned capital in this context? Weekly Options Weekly options provide the opportunity to make quite a few trades every month.
If price only needs to move a small amount to hit your target loss, you are probably assuming too much risk. The goal of the strategy is to keep the market trapped under the expiration break even lines without taking too large of a loss. Weekly Options Weekly options provide the opportunity to make quite a few trades every month. The trade will make money if the market moves up, stays about the same, or even goes down slightly.
If price trades higher, a second Butterfly can be purchased to stretch out the expiration break even lines. 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. Say for example that we sell a 10 point wide SPX vertical spread for a 1.
The trade will make money as long as price remains above the short strike at expiration. If price trades higher, a second Butterfly can be purchased to stretch out the expiration break even lines. One thing to keep in mind is that planned capital is different from the desired loss. Using time spreads and longer dated options will increase the significance of volatility. 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 how to day trade options with a small account work and what fits your personality.
Feel free to post any questions you have in the comments below and thanks for reading. Diversification across markets, expiration cycles, and strategies are all ways to reduce risk. There are both positive and negative Theta ways to trade options directionally. 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.
Using time spreads and longer dated options will increase the significance of volatility. Volatility Options traders are always watching volatility because it impact their positions. What is planned capital in this context? I only buy puts and calls with at least 2 month expiration.