lystn

Hey everyone, Kirk here again and welcome back to the daily call. Today’s call I think will be a little bit fun because I often get questions about this topic and I wanted to address it in a short little podcast really because I don’t think it takes too much time to address. But the topic we’re going to discuss is how to trade options with $1,000. A lot of people who get started in options trading, options newbies, want to get going really, really fast. They’re excited, I get it. They see potentially the income that you can generate with options, the non-directional approach to the markets. They love everything about it, but they just maybe don’t have enough capital to start. A lot of times, I get emails from people saying, “Hey, I’ve got $1,000 saved up. How do I get started?” Let me first say and state that I don’t think $1,000 is enough to start trading options. What I typically tell people to do is I typically say, “You need to save somewhere between $3,000 and $5,000 to really get a good start at this.” The reason I say that is because with $3,000 to $5,000, you can start applying most of our risk management rules, 5% position size, keep some money in cash. That starts working at that level. With $1,000, the numbers really don’t work that well, mostly because you can’t do high probability spreads. It’s like just over the threshold for our 5% risk per ticker symbol or per trade. That’s why with $1,000, what I’ll typically tell people is, “Look. Save some more money. Get a part-time job quickly. Sell some stuff around your house. There’s probably $2,000 of stuff in your house that you just maybe don’t need. Or downsize, move to a different place, rent a different apartment.” There’s probably a million things you could do to generate more income and capital to start trading. But let’s assume just for the sake of this podcast that you just have $1,000 or some small amount that you want to start trading with. You can use $1,000, you can use $2,000 or $3,000, some small amount and you want to ignore my advice that I’m giving you here and you want to start trading. I still believe that you have to trade spreads. If you want to start trading options and you want to do it with a small account, you have to start trading with spreads, meaning credit spreads, iron condors, iron butterflies and you have to make sure that you are not trying to force the success rate in your portfolio. What a lot of people do when they have a small amount of money is they feel like they can gamble more with that money. Whether it’s consciously or subconsciously, I see this happen a lot where they’ll take bigger positions because they want to earn higher dollar returns. But with $1,000, a 10% return on $1,000 is earning by the end of the year $100. If I told somebody, “Hey look. You may earn $100 doing this all year.” They might risk more money on trades because they want to generate more income because $100 doesn’t mean anything and to them, they’re looking at the total dollar return versus a percentage return in the account. That’s the challenge with working with small accounts, is that people often do this and they allocate more money, they take bigger risk, ultimately end up probably blowing up their account. But with $1,000, your risk position size should be no more than $50 per trade. That’s really hard to do with a spread because most spreads have at the bare minimum about a $65, $70 risk per trade. You’re really not even at that threshold which is why I said initially, you really can’t start with $1,000. But if you did want to force the issue, you’ve got to start with spreads and you’ve got to go slow. You can’t rush the system and the process. Work the probabilities. Do a couple of very small trades, super high probability. Get some income flowing in your account and please, whatever you do, don’t over-allocate. Don’t go for those long option strategies, those option-buying strategies where you think you’re going to double your account in one month because it never happens. Murphy ’s Law is that if something bad is going to happen, it probably will happen to you just when you get started. You have to really respect the rules of this game and respect the math of this game if you want to grow your account from that small amount to start increasing your account value over time. Hopefully that helps out. Again, I know it’s a concept and a topic that we get a lot, so that’s why I want to talk about it here on the daily call. As always, if you guys have any questions or comments, let me know. Until next time, happy trading!