Getting Started with Options Trading Strategies for Small Accounts

In my trading, I was also limited by this PDT restriction for the first 3 years while trading accounts around $1,000 to $3,000. Luckily, I was able to find strategies that helped me use these small accounts to pass the PDT rule many times. While this restriction can seem like a burden it can actually teach traders discipline as they are more likely to be patient and only play the very best setups they see. This is exactly what it forced me to do just a couple of years ago and that discipline allowed me to find strategies that can allow small accounts to excel. In some cases, these strategies can outperform traders who trade daily and Waterdown their gains doing so.

Small Account Options Strategy 1: Avoiding Day Trades Easily

The basis of this strategy is pretty simple, utilizing debit or credit spreads to lock in profit or losses. If done correctly this strategy can even position the trader to take advantage of future gains while fully protecting their profits and initial capital.

In short, a debit spread is when you buy an option contract and sell an option contract to create a trade that costs less. The long contract will typically cost more and create this net debit. This type of position is typically bullish for calls and bearish for puts.

A credit spread is when you buy an option contract and sell an option contract to create a trade that creates a credit. The short contract will typically cost more and create this net credit. This type of position is typically bullish for puts and bearish for calls.

Typically this is done simultaneously but if the long and short contracts are bought at different times this will allow the trader to lock in profits and losses. In order to create option spreads the trader will need to be level 3 approved from their broker for trading options on a margin account. Traders will not be able to utilize this strategy if this is not the case. Now let's go through some examples to explain.

Initial Strike Price Position Entered

As you can see below, a trade was entered for GLD in our options trading group with the details below:

• Expiration Date: 6/17
• Strike Price: 180
• Side: Call
• Cost: $3.95
• Current Price: $5.40
• Current Return: $1.45
• Stock Price: $177.20

As an options trader who doesn't have any day trades to use, it can be quite hard to know what to do in this scenario. Do you lock in profit? Do you let the trade run another day and risk it? Do you take the one trade and get banned for 90 days? This really makes it hard for traders to succeed in being controlled by this PDT rule. But here are some options that can help avoid using those precious day trades.

Protect Your Initial Capital (Debit Spread)

If we head the option chain, we can see that there are many calls above our current strike price that we will be able to sell, which will create a debit spread. This will create a bullish position for the trader where they will make money if the stock continues to rise.

Here are some considerations for how to pick the right strike price when creating vertical spreads:

• Going for a higher strike: Will protect less initial capital and profit but allow the trader to make more money if the underlying stock continues to rise to the profit target
• Going for a lower strike: Will protect more initial capital and profit but won't allow the trader to make as much money if the stock continues to rise to the profit target

If the trader decided to sell the $185 strike price:

• Protected capital: $375 is brought in as credit from selling the call which is basically the cost of the initial trade for the trader. This means that the profit of $145 is still at risk but the trader is basically getting to be a part of free trade.
• Upside Potential: By creating a debit spread the trader has the potential to bring in an extra $342 if the trade continues to rise to the short call strike price. This is one of the major benefits of creating a debit spread, and adding the short leg on later.

Protect Your Initial Capital (Credit Spread)

If we head the option chain, we can see that there are many calls below our current strike price that we will be able to sell, which will create a credit spread. This will create a bearish position for the trader where they will lose money if the stock continues to rise.

Here are some considerations for how to pick the right strike price:

• Going for a higher strike: Will protect less initial capital and profit but allow the trader to make more if the stock continues to rise
• Going for a lower strike: Will protect more initial capital and profit but won't allow the trader to make as much money if the stock continues to rise

If the trader decided to sell the $179 strike price:

• Protected capital: $575 is brought in as credit from selling the call which exceeds the cost of the initial trade AND the profit for the trader. This means that the profit and the initial cost of $540 is fully protected by the short call.
• Downside Potential: By creating a credit spread the trader has the potential to bring in an extra $40 if the trade reverses and the price of the underlying stays beneath the short call strike price. This is one of the major benefits of creating a credit spread and adding the short leg on later.

Small Account Options Strategy 2: Wednesday/Thursday Swing Trade

When my smaller accounts were under $25,000 and I was limited from day trading, I found it was best to swing trade. This is when you buy and hold for 1 or more days to take advantage of the momentum. This allows traders to avoid using a day trade and be able to sell the very next day sometimes. I was always looking for the best way to maximize my returns without using day trades and this was the strategy I consistently used to get over the PDT rule twice.

Swinging Good Setups With Short Expiration Date Options

Here are the criteria for this strategy:

1. Stick to 3-4 stocks that are extremely volatile
2. Watch, chart, and wait till Wednesday + Thursday
3. Find a killer setup (triangle, trending touch, momentum run, etc)
4. Swing trade options that expired that week with 2-3 days till expiration
5. Exit the next day for profits or losses

BONUS: Lock in profits or losses using spreads can allow traders to take advantage of the move if it happens to continue.

Short Expiration Examples

Earlier in this article, we talked about the GLD swing in our options trading group. While a longer expiration is good when taking advantage of longer trends, wanted a safer position with less time decay, and good for busy people who can't watch the computer all day. The only downside is that shorter-term options can increase extremely quickly in gap-up or aggressive moves.

It may be hard to know when this will happen but a proper chart and setup it can put traders in a position to succeed. When a high probable setup presents itself these short terms options will contain very good risk to reward. If your max loss is 50%, some weekly options run 100-500% which is a 1:2 or 1:10 risk to reward. In the long run, this can be extremely lucrative if executed properly.

The Difference in Returns on Expirations

Below, we can see the percent difference when getting closer and closer to short-term expiration date options.

• June 17 GLD Calls: 27%
• March 31 GLD Calls: 45%
• March 4 GLD Calls: 77%
• Feb 18 (2 days till expiration) GLD Calls: 160%

As you can see the percent return if the trader can nail a move properly could be in the magnitude of 2-5 times more. If the trader's stop loss is the same in all scenarios at 50%, the best risk to reward options is going to be 1-2 weeks out.

Small Account Options Strategy 3: Long Term Momentum Run

While weekly contracts require a high risk tolerance, after seeing many lose 50-70% in value in one single day, most traders would rather stay away from them. It can be quite difficult to have the technical analysis skills to properly succeed in trading short-term options. On top of that, many traders can be extremely busy and not able to monitor these types of trades effectively. That is why I am introducing a third small account strategy I just developed.

Swinging Good Setups With Long Expiration Date Options

Here are the criteria for this bullish strategy:

1. Look for stocks with green/blue ema clouds on the daily time frame
2. Wait for the yellow candle to appear
3. Swing options 1-3 months out
4. Scale-out slowly (100% win will allow traders to sell half, take out their capital, and let the profits run)
5. Exit everything on a bearish cloud flip (green to red)

In the example below, you can see once the candle flips yellow and the cloud flips green this initiates a great uptrend!

Here are the criteria for this bearish strategy:

1. Look for stocks with yellow/red ema clouds on the daily time frame
2. Wait for the blue candle to appear
3. Swing options 1-3 months out
4. Scale-out slowly (100% win will allow traders to sell half, take out their capital, and let the profits run)
5. Exit everything on a bullish cloud flip (red to green)

In the example below, you can see once the candle flips blue and the cloud flips red this initiates a great uptrend!

BONUS: Lock in profits or losses using spreads can allow traders to take advantage of the move if it happens to continue.

The Potential

The goal of any momentum run is to hit the massive trend and patiently hold. Sometimes this happens and sometimes it doesn't. The key to trading is to always put yourself in a position to win. Once in a while, a trader may hit a 1,000% trade but for the most part, it rarely happens. That is why it is important to scale out and leave some position on just in case.

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