Regardless of your current account size or trading experience level, you should be putting some serious thought into how you plan on scaling your options strategy over the next few years. Especially if you’re looking to generate a consistent monthly income from options trading, you probably realize that having $10,000 in your account won’t be enough to generate profits to replace your current job or salary - or if this was a shock to you, sorry for the reality check but it’s true. Still, you need to plan ahead for the changes that will accompany having more cash.
As with any regular business, the products and strategy for trading are going to change and shift as you grow. The core principles remain the same (i.e. selling options, taking advantage of high volatility, etc.) but the way you could about capturing profits and utilizing capital will need to be tweaked so that you’re always trading options as efficiently as possible.
3 Tips for Growing and Scaling Your Options Strategy
1. Start transitioning to undefined risk strategies.
- This is the easiest way to start allocating more capital and start generating more premium per trade.
- Can use up more of your margin to get into a position, allowing more room to scale your account.
- Allows you to sell less contracts, while at the same time receive more premium per contract.
- If you are trading in a larger IRA or retirement account and you still need to scale out, within reason, go as far out as possible with really wide spreads. This helps create a synthetic version of an undefined risk strategy.
Example:
- As you scale, if you are doing five credit spreads and taking in $100, now you could do three strangles and take in $300.
*Disclaimer: if you have an account balance of under $25,000, stick to the defined risk strategies.
2. Start transitioning to larger products.
- Larger products include bigger index options or larger price products, the big priced securities.
- This allows you to sell less options for a higher price, which means that you have the room to scale.
- Use all of these in your toolbox as potential trading vehicles moving forward.
- Higher priced index options: SPX, RUT, NDX. Ex: One SPX straddle in December is taking in $9,000 in premium and the margin is $4,200.
- Higher priced securities: QQQ, IWM, GLD, Netflix, Facebook, TLT, IBM, Baidu, Goldman Sachs, DIA, Tesla, Spy, SPY, IBB, Chipotle, Amazon, Google, Priceline.
Example:
- Google stock price is $7.83, so the December options for Google right now, the at the money straddle is trading for $4,000 — a lot of capital for the at the money straddle.
- This creates a $4,000 trade with a $1,500 margin requirement for one contract, which allows you to scale easily.
3. Start gravitating over to futures options, if you still run out of room in your portfolio.
- Futures options work similar to regular options, except for slight differences in pricing and they settle to actual futures contracts.
- The E-mini futures contracts are extremely liquid, giving you yet another option.
- There is a lot of activity in these, and they have a high value per contract so it is very easy to scale into these.
Example:
- With E-mini futures contracts (-ES), instead of settling to the SPY or to cash like the SPX, it settles to the futures contract itself.
- Again, this is not recommended unless you have a substantial portfolio because settling the future contract — if you are not there to handle them — could be really tough as far as handling the margin or the capital that is required to hold the position.
- Selling one at the money E-mini futures contract for December expiration gives you a credit of $4,700 and a $3,200 buying power effect, depending on the margin account and portfolio account that you have.
