How to Grow a Small Trading Account with Options [3 Step Strategy]
Indeed, such a tough job is involved when growing the littlest trading account, more so when the capital is very low. Many traders start from relatively smaller capitals but have an urge for high yields. Most of the time, they do not know the correct techniques that they need to apply. In traditional trading, the pace seems so slow, and when there are high-risk trades in a bid, huge losses might be very hard to bear.
Options trading is one of the best ways to grow a trading account very quickly, without considering how little the balance may be. Using the right options strategies, traders can seize market momentum while having low risk. The best way to grow a trading account fast by using options would be through the application of simple but powerful options strategies.
Follow me as I take you through an easy three-step strategy to grow your small account with options. You will know exactly how to set up an ATM put credit spread when the market is oversold and allow for growing your account using calculated risks.
3 Steps Strategy How To Grow Small Trading Account
Step 1: Identify an Oversold Condition Using RSI
The first move of this strategy is to identify an oversold stock or index. In this case, the RSI (Relative Strength Index) plays a role. The RSI is one of the momentum indicators used by traders to assess how a stock or an index is positioned: as overbought or oversold. A drop of RSI below 30 indicates an oversold condition, suggesting that an asset is likely to regain its previous upward trend or has the potential for a rally.
- Let’s take an example with the SPX index.
- When the SPX is experiencing a huge sell-off, and the RSI comes in at 30 or lower, it means the market is highly oversold.
- That’s when you’ll get your trade signal.
Step 2: Place a Credit Spread
With the RSI, once you conclude that it is indeed an oversold condition, it’s time to trade. Here, we will be trading a put credit spread. A put credit spread is a strategy that involves selling one put option while simultaneously buying another put option with a lower strike price. Both options must have the same expiration date.
- For example, if today the SPX is at 4,393 and the oversold conditions come through on the RSI, it will be a smart trade to sell 15 contracts of the 4,310 strike put option-at-the-money-while buying 15 contracts of the 4,305 strike puts at the same time.
- This nets a small credit while still managing the risk since you’ll be covered by the put you bought at the lower strike price.
This is a strategy called an at-the-money put credit spread because the short strike is proximate to the current trading level of the index. The premium received from selling the higher strike put is over the cost of buying the lower strike put, so there’s a net credit.
Step 3: Trading Towards Expiration
Now you just let the trade run to expiration, so you maximize your profits. Most of the time, the market tends to recover from oversold conditions in approximately 60 days. So you want to allow the option to expire with about 60 days to go. You are hoping that both the short and the long puts will expire worthless so that you get all the credit received from the original trade.
- For example, if there is a rebound in SPX closing sharply higher than the strike price of the short put at expiration, then both the short and long puts will expire without being exercised, leaving you to collect all the premium taken off of the trade.
- Historically, this strategy has been proved to produce fantastic returns when the market is oversold.
For example, with a put credit spread that shows a net inflow of $2,625, an effective trade in which both options expire worthless will greatly enhance your account balance. Repeated use of the strategy under conditions that cause markets to become oversold will occur across hundreds of trades, and it will thus be an integral part of your overall account growth over time.
Why It Works
There are several reasons why this three-step options strategy works:
- Limited Risk
A put credit spread limits the risk of the trade to the trade itself. And at entry into the trade, you will always know how much your risk can go against you, which is the difference between the two strike prices, minus the premium received. This means controlled risks, even in high-volatility markets. - Higher Probability of Success
Entries based on trading from oversold conditions enhance your odds of making profits since the market will statistically likely bounce. Generally, the RSI indicator is reliable enough, and a 60-day time frame is enough for the market to recover. - Scalability
It works both in small-sized accounts and scales up to any size. Whether it is a $5,000 account or a $50,000 account, you can fine-tune the number of contracts in proportion to your account size for making trades which work capital-efficiently for you, while keeping the same strategic approach.
Some Winning Trade Scenarios as Case Studies:
- Trade 1: You have $5,000 left in your trading account. You execute a put credit spread with the SPX oversold and collect a net credit of $2,625. Your account balance is now up to $7,625 with one winning trade.
- Trade 2: You enter another put credit spread on another oversold signal and collect a net credit of $2,775. The SPX pops again, and your options expire worthless, bringing your account balance up to $10,400.
- Trade 3: The next time the RSI goes into oversold territory, you enter a third trade; your ending account balance after the options expire is now $12,545.
These are but simple examples as to how easily you can double your account balance in a series of three trades. This is the art of the strategic use of options when the market conditions are right.
Conclusion
One can grow even with a small trading account in three easy steps: proving conditions are oversold, entering a put credit spread, and trading to expiration. The strategy gives a much better chance of succeeding when entered at the right conditions in the market.
This strategy will serve as the basis for your trading, whether you begin trading small on a small account or scale up options trading. Applied appropriately, these strategies will put you on the road toward becoming a more confident and profitable trader.
So, are you now ready to move your options trading system forward? Now’s the time to start building blocks of these strategies.