How To Start Options Trading with a $1,000 Account
Summary
TLDRIn this educational video, Mike B. Fury from a top New York trading firm introduces a simple options trading strategy suitable for small accounts. Head Trader Seth Freberg demonstrates the 'Iron Butterfly' strategy using index options, detailing its three steps: setting up the trade, managing capital requirements, and exiting based on profit or loss thresholds. The video emphasizes the importance of backtesting and highlights the potential for consistent income with modest capital, showcasing how even a $1,000 account can yield significant returns.
Takeaways
- 📈 The video introduces a simple options trading strategy suitable for small accounts, emphasizing that even with limited capital, traders can engage in sophisticated trading strategies.
- 🏙️ Presented by Mike B. Fury from a top proprietary trading firm in New York City, the video aims to educate traders on how to grow their accounts using specific strategies.
- 📚 Seth Freberg, head trader of the options trading desk, shares insights, indicating that traders with as little as $1,000 can start trading certain option strategies.
- 🔑 The video teaches a three-step process for executing an 'Iron Butterfly' options trade, which can be done daily with a small capital outlay.
- 📉 The strategy involves selling at-the-money call and put options (short straddle) and simultaneously buying out-of-the-money call and put options (long strangle), creating an Iron Butterfly position.
- 💰 The trade's cash flow is explained, detailing the premiums received and paid, and how these relate to the capital requirement for the trade.
- 📊 The importance of time decay in options pricing is highlighted, showing how it can work in favor of the trader by reducing the cost of buying back sold options.
- 📉 The video provides a real-world example of how the strategy can be executed and the potential for profit or loss based on market movement.
- 🚫 It cautions traders about the risks of significant market movements early in the trading day, which can lead to losses if not managed properly.
- 📈 The script outlines a systematic approach to trading with defined target profits and maximum loss levels, emphasizing the need for backtesting to ensure long-term viability.
- 🔗 The video concludes by offering additional learning resources for those interested in expanding their options trading knowledge and strategies.
Q & A
What is the main topic of the video presented by Mike B. Fury?
-The main topic of the video is teaching a simple options trading strategy that can be executed with a small account, specifically using index options.
Who is Seth Freberg and what is his role in the video?
-Seth Freberg is the head trader of the options trading desk at SB Capital in Manhattan, and he explains the Iron Butterfly options strategy in detail.
What is the Iron Butterfly strategy and how is it constructed?
-The Iron Butterfly strategy is an options strategy that involves selling an at-the-money call and put simultaneously (short straddle) and buying an out-of-the-money call and put that are 20 points away from the short options (long strangle), creating a limited risk and limited profit trade.
How much capital is required to start trading the Iron Butterfly strategy as presented in the video?
-The video suggests that the Iron Butterfly strategy can be traded with a small account, starting with as little as $1,000.
What is the basic premise of the Iron Butterfly strategy in terms of profit and loss?
-The strategy aims to profit from the time decay of options, where the short options lose more value than the long options, especially if the market doesn't move much after the trade is initiated.
What is the significance of 'zero DTE options' mentioned in the video?
-Zero DTE (Days to Expiration) options are options that expire on the same day they are traded, which is crucial for the Iron Butterfly strategy as it capitalizes on the time decay effect within a single trading day.
What is the target profit and maximum loss criteria for the Iron Butterfly strategy as presented in the video?
-The video suggests a target profit of 10% of the capital required for the trade and a maximum loss of 20% of the capital required before closing the trade.
How does the time decay affect the profitability of the Iron Butterfly strategy?
-Time decay affects the profitability by causing the short options to lose more of their premium value compared to the long options, especially if the market remains relatively stable after the trade is initiated.
What is the importance of backtesting in relation to the Iron Butterfly strategy?
-Backtesting is important to determine the optimal target profit and maximum loss for the strategy, ensuring a long-term edge by analyzing different combinations of these parameters.
What additional resources are offered to viewers interested in learning more about options trading strategies?
-Viewers are offered a free workshop registration to learn three more option strategies and additional trading techniques by clicking the link provided in the video.
Outlines
📈 Introduction to Small Account Option Trading Strategy
The video introduces a simple option strategy suitable for small accounts, which can be learned quickly and traded daily. Mike B. Fury from a top proprietary trading firm in New York City highlights the ability to develop successful traders with limited capital. Seth Freberg, the head trader, explains that even with a $1,000 account, traders can engage in index options trading using a three-step process. The video also offers a beginner's guide to options trading and illustrates the strategy with a real-world example from June 3rd, involving selling at-the-money options and buying out-of-the-money options to create an Iron Butterfly spread.
📊 Understanding the Iron Butterfly Spread and Capital Requirements
This section delves into the specifics of the Iron Butterfly spread, explaining the cash flow and capital requirements for the trade. The example on June 3rd demonstrates how selling the 52.95 call and put and simultaneously buying the 5315 call and 5275 put creates the spread. The premium received and paid for these options is calculated, resulting in a net cash inflow and a capital requirement of $650, which is within the $1,000 account limit. The video also discusses the importance of time decay in options trading and how it affects the profitability of the strategy.
📉 Implementing the Strategy and Managing Profits and Losses
The video script outlines the process of executing the Iron Butterfly strategy, emphasizing the importance of monitoring the market's movement to determine when to close the trade for profit or cut losses. It provides a clear rule of thumb: take profit if the trade profit reaches 10% of the capital required or cut loss if it reaches 20%. The example on June 4th shows how the market's slight drop led to a profitable outcome, while the June 7th example illustrates the risk of significant market movement early in the day, which can lead to losses due to the short options' rapid increase in value.
🚀 Conclusion and Additional Learning Opportunities
The final paragraph wraps up the video by emphasizing the viability of trading options income strategies with a small account. It highlights the success of the strategy over a week, with four winning trades out of five, resulting in a 20% return on a $1,000 account. The speaker advises viewers to establish optimal target profits and maximum loss levels through backtesting. The video concludes by inviting viewers to learn more strategies and tricks used by professional traders through a free workshop, encouraging small account traders to build confidence and explore options trading.
Mindmap
Keywords
💡Option Strategy
💡Short At-The-Money Straddle
💡Long Strangle
💡Iron Butterfly
💡Capital Requirement
💡Time Decay
💡Target Profit
💡Maximum Loss
💡Zero DTE Options
💡Options Chain
💡Proprietary Trading Firm
Highlights
A simple option strategy suitable for small accounts, teachable in minutes and tradable daily.
Introduction of Mike B. Fury, a top proprietary trading firm in New York City since 2005.
Mention of developing seven and eight-figure per year traders.
Seth Freberg, head trader of SB Capital's options trading desk, shares insights.
Options strategies can be traded with a small account, contrary to common misconceptions.
Teaching a three-step process for trading index options with a $1,000 capital account.
Explanation of zero DTE (Days to Expiration) options and their role in the strategy.
How to execute a short at-the-money straddle in the options world.
Construction of an Iron Butterfly using a long strangle 20 points out of the money.
Cash flow analysis of the Iron Butterfly trade from a premium perspective.
Calculating capital requirement for the trade using the distance between short and long options.
Strategy's profit and loss exit criteria based on 10% profit or 20% loss of capital.
Demonstration of the trade's outcome with market movement and time decay effect.
The importance of time decay in options pricing and its impact on the trade's profitability.
Weekly scorecard of trades, showing a 20% return on a $1,000 account.
Emphasis on the need for backtesting and finding an optimal target profit and maximum loss.
Encouragement for small account traders to learn and apply systematic strategies.
Invitation to learn more strategies and tricks for options trading through a free workshop.
Transcripts
even if you have a very small account
there's a simple option strategy that
takes minutes to learn and can be traded
every day in this video you'll learn the
exact steps to do all of this I'm Mike B
Fury and we're one of the top
proprietary trading firms located in New
York City since 2005 and proud to
develop numer 7even and even eight
figure perear Traders watch take notes
and learn from the head of our options
trading desk so you can grow your
trading account hi I'm Seth freberg and
I'm the head Trader of SB capitals
options trading desk here in Manhattan
and while we have traders that have
access to millions of dollars of capital
here at the firm we're also in contact
with Traders all over the world maybe
like yourself that are just getting
started trading and they have some
limitations on their capital and can
fund an account with say $1,000
initially but that's all that they can
do initially and so I often get asked if
I only have $1,000 in my account does
that mean I can't really trade the
option strategies that you guys trade
and the good news is that many option
strategies can be traded with a small
account and that's what this video is
about to teach you a strategy that can
easily be traded with a $1,000 capital
account using index options and all you
need to do is learn the three easy steps
to putting this trade on now before we
get into the option strategy that we're
going to be teaching you in the video if
you're absolutely brand new to options
trading and you don't know much about
how options work we put together a video
for you to understand options Basics and
if you click the video appearing on your
screen right now it will lay the
groundwork for you to understand the
option strategy that we'll be teaching
you in this video Then when you're
finished you can come back and watch the
rest of this video to illustrate this
strategy which is a trade you can
actually take every single trading day
of the week let's head back to the first
trading day of this month June 3rd and
as you can see see the SPX index which
represents the basket of stocks
comprising the S&P 500 Index had opened
at
5295 73 that morning and so the first
step in the process of making this trade
is to pull up an options chain expiring
that same day what are known as zero DTE
options and find both the call and put
option which are closest to where the
market opened that morning which was the
52 95 strike price that morning and
right after the opening bell we go ahead
and sell the 52.95 call and the 5295 put
simultaneously in a transaction known in
the options world as a short at the
money straddle and in a minute we'll
explain to you why you are doing this
but let's move on to the second step
which is to on the same options chain bu
what options Traders refer to as a long
Str strangle 20 points out of the money
by buying a call 20 points above the
short call up at 5315 and simultaneously
buying a long put 20 points below the
short put at
5275 and when he's completed that then
he has constructed what options Traders
refer to as an Iron Butterfly and in
fact any competent options broker
platform is going to have a drop down
menu that will allow you to execute all
four parts of this trade at once if you
select the Iron Butterfly option on the
drop-down menu so now let's break down
what's happened here from a cash flow
standpoint so you can understand how the
trade works and so starting with the
call we sold at the money at 52.95 we
received the price of 9.65 for those but
remember index options pay off at $100
per Point beyond the option strike price
when they settle so you multiply that by
100 and that's we received $965 for the
short call and using the same approach
we see that we've received $920 for the
$52.95 put we sold and then the
protective call up at 5315 cost us 215
while the protective put down at 5275
cost us $320 so netting it all down we
received
$1,350 in cash in our account when we
enter this trade and so you might be
asking hey the market just handed me
$1,350 in cash when I enter the trade
but how much Capital will I need for the
trade because I've only got $1,000 in my
account and so the way that you can
figure that out is that you take the
distance between the short and long
options and you multiply that by 100 and
then you subtract out the premium
received and so as we mentioned earlier
the distance between the short and long
options was 20 points because the long
call was 20 points above the short call
and the long put was 20 points below the
short put and so in both cases the the
the distance is 20 points because the
long options are equidistant from the
short options and as we just calculated
the premium was 1350 and so if we apply
the formula you can see that 20 * 100 is
2000 minus the 1350 premium received for
a net capital requirement of
$650 on this trade well within the
$11,000 account limitation that we've
given ourselves for the purposes of this
video and so now let's move to a little
later that morning at 1010 a.m. and as
you can see the price of SPX dropped
from its opening 52.95 price down
slightly to 52.90 at 1010 a.m. and so
you'd expect that the calls would lose
value and the puts would gain value if
the market sold off which is exactly
what happened and so now it's time to
take the third and final step in trading
the strategy and that is either to take
the trade off at a profit if the level
of the trade profit is 10% of the
capital required on the trade or take a
loss if the profit level is 20% of the
capital required and so how can we
determine if we'd hit 10% profit or 20%
loss
and so the easiest way to know that is
to ask
yourself if I close the trade right now
buying back the options I sold and
selling the options I bought what would
be the outcome of the trade so let's see
how that would play out if at 1010 that
day we had closed the trade just that
way and so starting with the initial
premium we received that
$1,350 will then note as you can see
that we needed to pay
$655 to buy back the short call
resulting in a payment of
$655 and 11160 to close the short put
but then we sold off the Longs for
positive cash flow resulting in if we
were to close the trade now a profit of
$73 which as you can see is above our
trade threshold of 10% of the required
trade capital and that's it we're done
for the day and our thousand account is
now up 73 bucks to
1,073 and the reason this happens is
that as options move closer and closer
to the time that they expire which is
400 p.m each day on zero DTE options
they start shedding some of the premium
that they originally had when we first
entered the trade in a process to known
to options Traders As Time Decay and
since the options we sold had much more
premium than the ones we bought they had
more premium to lose than the ones we
bought that were 20 points out of the
money and so if the market doesn't move
around a whole lot from the time we put
the trade on by 30 to 90 minutes into
the trading session they will have
already lost a good deal of their
premium because the market is only open
6 and a half hours each day so 30 to 90
minutes is actually a long time when it
comes to a market day and so often time
the premiums on those short options
which had much more premium to lose in
the first place will have lost so much
compared to how much the long options
lost that if you bought the shorts back
and sold the Longs off like we did in
this case you'll very often find that
you don't need to pay as much to buy it
back as you had received when you sold
it which of course is because of that
time Decay we mentioned a minute ago and
that's why the trade Works basically the
relative time decay of the short options
versus is the relative time to decay of
the long options and so let's now move
to the next day and just rinse and
repeat and so on this day the market had
opened at 52651 12 and so the at the
money strike was obviously the 5265 call
and put which we sell and we buy the
5285 call and also buy the
5245 put to complete again our Iron
Butterfly and the positive cash flow in
this case is as you can see
$4.95 and therefore as we explained
before the capital requirement would be
$55 and so now moving to 1055 on that
same day 85 minutes into the market so
much longer than the previous Case by
the way it turns out that the market was
trading at
5267 which is only two points from where
it opened at
5265 and so in this case all all of the
options have shrunken value because of
that natural time decay of options
premium but in this case since the
market hardly moved at all all four of
the options lost value and so if we
tried to close the trade at this point
we'd find that again starting with the
1495 we collected in the beginning of
the trade we'd have to spend 1170 and
980 to buy back the call input but we
can sell off the long options for 355
and 380 resulting in a profit of $80
which in this case represented more than
a 15% return on the capital in the
Tuesday trade and so it's not to be too
tedious we could just show you that both
the June 5th and June 6th trades were
also profitable but then we came to the
June 7th trade the Friday trade with the
Market opening at
5331 and the trade being centered at
5330 therefore and as you can see we
collected this time $515
which results in a capital requirement
of
$485 but this time the market moved
quite a bit and so let's take a look at
what happened by 10:00 a.m. that day and
as you can see the market rallied more
than 17 points resulting in the calls
really exploding in value and the puts
really dropped substantially as well and
when we get such a strong move like that
so quickly earlier in the day the result
of it is going to be that the effect on
the short option on the side of the move
in other words the short calls in the
case of a rally or the short puts in the
case of a selloff those short options
are going to blow up so much because
they're located right where the index is
trading at the open so the deeper the
market penetrates that side the more the
trader is at risk of that option closing
really deep in the money causing to have
to pay off a huge amount of cash and so
that price has to just keep Rising very
aggressively to keep up with that move
and when that happens particularly early
in the day like 10:00 a.m. then there
isn't enough time for that time Decay to
meaningfully drop the options prices
like they did in the earlier cases and
so what often happens is a loss and so
let's see what takes place on this trade
and so if you wanted to buy back the
trade at 10: a.m. here's the calculation
with the one really getting clobbered
being that 5330 call which blew up and
priced to
2355 way way more than we were paid to
sell it in the first place and so the
loss on that option is so bad that it
throws us into a loss on the whole trade
and by 10:00 a.m. that loss had climbed
to $110 which is our stop resulting in a
loss of more than 20% so we've got to
close that trade and so now we can
complete that week's scorecard and as
you can see the trade won four out of
five times that week resulting in a $21
profit for the week a 20% return in a
week on a $1,000 account and you'll
notice the capital requirement of any
one trade never got even close to $1,000
and so what I'd like you to take away
from today's video is that you can
easily trade options income strategies
with a small account and many Traders
like to use systematic strategies like
this Iron Butterfly trade with a modest
Target profit and maximum loss and
simply repeat it each day many of the
one-day strategies can end within the
first 60 to 90 minutes of the day and
would be perfect for folks who want to
start learning about how to trade
options but may not be able to sit in
front of the screen all day and may not
have all that much capital
now I'd like to caution you that you
need to establish on a trade like this
exactly what is the optimal Target
profit and maximum loss on any repeated
strategy and you would be best served
doing that by back testing multiple
different combinations of Target profit
and maximum loss percentages until you
settle on one that seems to have
long-term Edge the 10% profit Target 20%
Max loss example in this video is a
possibility but you'll need to work on
that yourselves to see if that has
long-term Edge or perhaps some other
combination may make more sense that's
the experimentation piece that's so
necessary and that all hardworking
professional options Traders will
undertake before they get serious about
any repetitive option strategy like the
one we presented in today's video so
don't be shy about learning to trade if
you have a small account there's a
boatload of strategies that small
account Traders can use to build their
confidence as Traders over time now if
you'd like to learn three more option
strategies that our prot Traders use
including the unique options trick that
allows you to make money while you wait
to buy stocks or ETFs at the price you
want and the options income strategy
that allows you to make consistent money
whether the market goes up or down or
sideways and how to make money on a
stock or index trade even if you're
wrong on the direction then click the
link that's appearing right now at the
top right hand corner of your screen
that will open up the free Workshop
registration page in a new window so
don't worry you won't lose this video or
you can register directly for free at
options.com
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