How to Trade Straddles & Strangles in Small Brokerage Accounts
Most newbie option investors start trading with small brokerage accounts. Whether by choice or necessity, the average investor opens up their account with approx $10,000 according to most brokers. And while this isn't a small amount of money by any means, it does limit your ability to trade more aggressive options strategies like straddles and strangles.
In this podcast, I want to help you understand how you can still trade these more aggressive and profitable options strategies (synthetically with small tweaks) even if you've got a small account or are trading in and IRA. Specifically, I'll answer a bunch of common questions I get from new PRO members including; What if I can't trade straddles and strangles? How do I adjust the trading alerts to fit my portfolio? Should I scale position sizes down or up (# contracts)? What about spread width - go wider or more narrow? What if the commissions are eating too much into the profit after closing at 50%?
Sure, it might take a little more time to grow and mature an account but don't jump ahead or try to "game" the system. Eventually, the math and probabilities always play out the way they should, and you've got to learn how to build profitable strategies today if you plan on still being around in five or ten years from now.
Key Points from Today's Show:
- Options trading is a long-term game that requires strategy and patience.
- Having a high level of patience in options trading can make or break your success with your trading strategy. Many positions require time to show the types of returns that traders are after.
- The results that you are trying to achieve may not be available now that will be in the future. If you try to game the system, you will see the consequences later on.
- Two months is not a long term strategy. Although the negative effects may not be visible now, they will become clear later on.
Strangles and Straddles: To trade or not to trade?
- Strangles and straddles generally have higher win rates and shorter durations for trading time. These positions are not held for long periods of time, they make more money, and are really easy to adjust.
- However, sometimes trades cannot be done with either strangles or straddles. The best option in both cases is using a "synthetic cousin” to straddles and strangles.
- In the case of a straddle, it is a short at the money call and a short at the money put. So if a stock is trading at $100 you would sell $100 strike put and the $100 strike call, and taking some of the premium and buying further out the wings to create a risk-defined position.
- Strangles are selling options far out on either end. With a strangle you might only be able to buy options $2 or $3 past your short strike because in this case, your short strike is already $5 or $6 out from where the stock is trading.
Adjusting Alerts to Fit Your Portfolio
- You have to keep your portfolio or position size in mind and then start working backward from this. Remember to scale up or scale down your position to fit your specific individual portfolio size.
- If you are working with a smaller portfolio, scale down the number of contracts first. If you still have too much risk for that one trade, then you need to narrow down your spread width.
- A narrow spread will have less risk, but also less profit potential because it will cost more money to buy the options that are tighter in. Be patient and realize that this strategy will not prohibit you from growing; it will just scale back the trade to fit your account size.
Avoiding High Priced Commissions That Eat Into Your Profits
- The first strategy would be to trade less contracts and go wider in your spread, especially when your account is still within the 1 to 5% allocation in your account size.
- Overall, take in more money but on less contracts and hopefully you can also get your commissions reduced, and make the spread a little bit wider if commissions are eating into it.
- Convert most of your trades to becoming iron butterflies, which takes in a lot more premium for that trade. This will definitely sacrifice your win rate, but for the time being, you will be collecting a lot more money with a positive outcome.
- Focus on collecting as much premium as you can to cover the commissions until you get more money in your account, or until you reduce your commission costs.