How To Start Options Trading with a $1,000 Account

Summary

In 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

00:00

📈 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.

05:01

📊 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.

10:02

📉 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.

15:03

🚀 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.

Keywords

💡Option Strategy

An option strategy refers to a defined set of options trades designed to achieve a specific financial outcome or risk/reward profile. In the video's context, it discusses a simple strategy suitable for small accounts, emphasizing its daily tradability. The script mentions constructing an 'Iron Butterfly' as the strategy, which is a complex option strategy that involves four different options contracts.

💡Short At-The-Money Straddle

A short at-the-money straddle involves selling both a call and a put option with the same strike price and expiration date. It's a strategy used when an investor believes the underlying asset's price will not move significantly. In the script, this strategy is the first step in the Iron Butterfly, where the SPX index options at the market open price are sold.

💡Long Strangle

A long strangle is an options strategy where an investor buys a call and put option with different strike prices but the same expiration date, typically when the investor expects significant price movement. The script describes buying a call 20 points above and a put 20 points below the at-the-money options as part of the Iron Butterfly strategy.

💡Iron Butterfly

An Iron Butterfly is an options strategy that involves four trades: a short at-the-money call and put, and a long out-of-the-money call and put. It profits from low volatility and minimal price movement in the underlying asset. The script uses this strategy as an example, illustrating how it can be executed with a small account.

💡Capital Requirement

The capital requirement refers to the amount of money needed to enter into a trade or investment. The script explains how to calculate the capital requirement for the Iron Butterfly strategy by using the difference between the strike prices of the short and long options and the premium received.

💡Time Decay

Time decay, or theta, is the loss of value in an option as it approaches its expiration date, assuming all other factors remain constant. The script explains that time decay is a key factor in the profitability of the Iron Butterfly strategy, as the short options lose more value than the long options due to their proximity to the current market price.

💡Target Profit

A target profit is a predetermined level of profit at which an investor decides to close a trade. The script mentions a 10% profit target as a threshold for closing the Iron Butterfly trade, indicating when the investor should take the profit and exit the position.

💡Maximum Loss

Maximum loss is the greatest amount an investor is willing to lose on a trade. The script sets a 20% maximum loss level as the limit for closing the trade to prevent further losses, emphasizing risk management in options trading.

💡Zero DTE Options

Zero DTE (Days to Expiration) options are options contracts that are set to expire on the same day they are traded. The script uses zero DTE options for the Iron Butterfly strategy, which means the options expire at the end of the trading day, adding to the strategy's complexity and time sensitivity.

💡Options Chain

An options chain is a list of all options contracts for a particular security, typically sorted by strike price and expiration date. The script instructs viewers to pull up an options chain for the SPX index to find the at-the-money call and put options to initiate the trade.

💡Proprietary Trading Firm

A proprietary trading firm is a company that trades its own capital, often in financial markets, with the aim of making a profit. In the script, Mike B. Fury introduces the video as being from one of the top proprietary trading firms, emphasizing the expertise and experience behind the strategies being taught.

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