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In this one, we discuss how you can trade options with a small account. There are three approaches most commonly taken when trading options with a small trading account. This first is trading with out of the money options. They are cheap, making them within the budget of a small trader, but they also have high break-evens. In addition, if you wan them even cheaper, they expire in the near-term. This makes these kind of options inherently more risky, although the do provide more leverage as compensation for this risk. However, this type of strategy does not have positive expected value. Positive expected value is the concept of making money over the long-run when playing the probabilities involved with trading correctly. Buying OTM options likely doesn’t have positive expected value, but even if it does trading with a small account can’t handle a few bad trades in a row without going bust. So, even if you do everything right, bad luck can ruin you.
The second approach is by trading spreads. This limits your capital-at-risk, enabling you to diversify your trades into a plethora of underlyings. However, the bid-ask spread and limited profit potentials will eat into your capital (initial investment). And even still, you may not be able to handle some bad luck up front even with positive expected value.
The third, and last, approach is by not trading options right now. Instead, save up until you have around $1000. Then you can handle some bad luck, you can cope with the bid-ask spreads, and you can have negative expected value while learning without worrying about destroying your options trading account in a matter of minutes.
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