lystn

Hey everyone, welcome back. This is Kirk here again from Option Alpha and on today’s daily call, we’re going to be talking about trading options with a little bit of money and some best practices around this just as another reminder of things you can do. I really want to focus on five things in today’s call because I keep getting lots of emails from people on trading options with a little bit of money or they’re just starting out and maybe they’re just allocating a little bit of money to options trading just to see if it works before you allocate more money. But whatever the case, I think there’s a couple of best practices that you can follow, so make sure you're doing these five things. Number one is before you even start, try to reduce your commission cost. Now, look. This can be hard depending on what broker you’re at or where you’re at the country or the world. I get that. But try to go towards one of these lower cost brokerages. That's probably the easiest way. Yes, it might take some time to move your account over, but I think trying to check out some of these lower cost brokerages and just get your commission cost down initially is probably step number one. Step number two, once you start actually placing positions, is really, really focus on position size. I can’t harp on this enough. Position size is everything, especially when you're starting with a little bit of money because you don't want one position to kill you. Sometimes what people do when they start trading options with a little bit of money is they look at the dollar size of contracts versus percentage allocation risk, etcetera. And let’s say they’re trading with $1,000 or $2,000. They might want to make $500. Well, that’s 50% of your account. I don’t know if you want to take on so much risk that maybe a trade might go bad and you might lose half of your account in one full swoop. Now, $500 might not be a lot for you. It might not. You might just be, “Hey, I’m going to play with $1,000, see if it works, try to make $500.” But you’re setting yourself up for a bad recipe and strategy or system that doesn't really focus on what you would normally do if you had more money. Please keep that position size in check, 1% to 5% per ticker symbol. Number three is focus on probably higher than normal probability of success trades. What we do at Option Alpha or what I do with my trading is most of my trading is around 70% chance of success. You might want to start focusing on an 80%, 75% chance of success trade to start with. Again, knowing that you’re going to take it off early, take profits early which means that the win rate might even be higher, but it might be more important to get a few wins under your belt. Trade some stuff that has a higher probability of success. Now again, even though it has a higher probability of success doesn't mean that it’s going to be a winner. You still could if you trade at the 80% chance of success level, the first two out of 10 trades could be the ones that are losers. Just realize that that is a realistic outcome. The first two out of your 10 trades could be losers. That's where position size comes back into play. That position size is going to allow you to trade through that scenario, so that you trade 10 trades and you do hit your eight out of 10 or nine out of 10 that end up being winners. Number four then is balance becomes super important. When you’re trading with a little bit of money, every little position that you add is actually amplified because you don’t have the capacity to add hundreds and hundreds of positions in contracts. You can’t spread your capital out over the course of 25 different ticker symbols like we might be able to on a normal month. That means balance becomes super, super important. Just double-check the portfolio balance that you have, try to do things more neutral than not and try to get some of the big rocks in place as far as ticker symbols and things that you trade. Don't trade everything in financials. Don't trade everything in oil. Maybe have an index, bonds, European or currency or precious metals, a commodity. Try to get four or five of the big sectors and big areas in place and trade around those first because that’ll help balance you out. And number five here is focus on trade count. I think the goal should be as you trade with a little bit of money is to focus on increasing your trade count, getting your numbers up, so that you start making over the course of a couple of months, 20, 30, 40, 50 trades over time and they start adding up, so that your probabilities become more focused and more concrete. Remember, even though we’re trading at a 70% or 80% probability of success, that doesn't necessarily mean that your first 100 trades are going to see exactly 70 winners and 30 losers. You could have a pretty wide variance in that until you get your trade count up. Really focus on increasing your trade count. Play the long-term game here because the long-term game is what ultimately ends up winning out. People who quit early or give up early always end up failing. They don’t really see the numbers to fruition. That’s really our goal. Again, number one, reduce commission cost, two, check your position size, three, focus on higher than average probability of success, number four, balance becomes super, super important and number five, focus on that long-term trade count, the long-term output of trading options. Hopefully that helps as always and until next time, happy trading!