Stock Options Trading Strategies For Small Portfolios That Works
These stock options trading strategies for small portfolios will help boost your trading account. A small portfolio of stocks can be one of the most profitable investments you can make in your lifetime, especially if you learn the best stock options trading strategies to get you started.
Here are some tips and tricks to help you start making money with stock options trading using only the money that’s in your pocket right now.
1. Sell Calls for Income
If you are just getting started with stock options trading, one of the most reliable strategies is to buy calls and sell call options.
Buying calls is a bullish strategy where you’re betting that the underlying price will go up. Selling call options is a bearish strategy where you’re betting that the underlying price will go down.
Let’s say you think XYZ company is going to do well in the next six months so you buy 100 shares at $50 per share for a total investment of $5,000.
You could then use some of your shares to purchase call options (let’s say 50). Let’s say that over time, the share price increases by 10% to $55 per share.
Your 100 shares are now worth $5,500 and those call options you purchased will now be worth $1,050.
On the other hand, let’s say that over time the share price decreases by 5%. Your shares would be worth $4,750 ($4,500) and those call options you purchased would now be worth -$250.
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2. Buy Puts for Protection
Puts are a type of option contract. A put option is a contract that gives the owner the right, but not the obligation, to sell a security at a certain price, called the strike price.
Put options can be used as an effective way to control stock positions or protect against downside risk in a portfolio.
If you own a stock and want to insure it against future losses, then you could buy a put option on the same stock with an exercise price lower than what you paid for your shares.
If you were long 100 shares and bought one put with an exercise price $5 below your purchase price, your total investment would be $4100. Your profit potential will depend on how low the price goes. The worse it does, the higher your profit potential becomes.
But if you don’t have enough capital to cover either your stocks or the puts, then this strategy won’t work because if either asset decreases in value too much then you will lose both assets.
3. Buying Deep in the Money
If you are looking to buy deep in the money options, you can’t go wrong with out-of-the-money put options. This strategy will not yield any return on an investment unless the underlying asset falls below the strike price of your put option.
However, if the asset does drop and you’re able to hold onto your position until expiration day, then this is a great way to make some quick cash.
On top of that, when using this technique it’s best to use a higher strike price because the premiums for options at a lower strike price will be less than those at a higher one due to the difference between time and money.
4. Go Long LEAPS
Leaps are a type of long-term stock option. They are not as liquid as regular stocks, and they tend to be more expensive than regular stocks. But leaps offer you the opportunity to buy stocks at a fixed price for up to three years in the future.
That means if you think you know what a company is worth, and you want that company’s stock now but don’t want to pay today’s prices, then leaps may be for you.
You can purchase them with an expiration date, or you can trade them after they’ve expired – just like any other options contract. If your prediction comes true (i.e, your leap pays off), then your leap becomes valuable and can be sold on the open market to make a profit.
5. Pay Attention to Time Decay
Time decay is one of the most significant factors to keep in mind when trading options. The longer you have until expiration, the more time value will erode from your option.
This means that your option will be worth less and can impact whether or not you decide to exercise it, as well as what your profit/loss might be on a trade. When trading options, always remember that time decay is a key factor in determining how much value an option has.
One thing to pay close attention to is the amount of time left before the option expires, as this determines how much time value remains.
Depending on your needs and goals for a particular trade, this may determine if you want to buy or sell an option before its expiration date.
6. Leverage Volatility and Inverse ETFs
The best way to trade options is to focus on the volatility, not the individual stocks. Volatility is a measure of how much a stock price can change in a given time period.
Inverse ETFs are designed to provide traders with an opportunity for gains when markets are falling and losses when markets are rising.
One inverse ETF that has been popular this year is ProShares Short VIX Short-Term Futures ETF (SVXY). SVXY invests primarily in S&P 500® Index futures contracts and earns daily leveraged exposure to these index futures contracts as they near expiration.
READ ALSO: How to Make Money from Options Trading: A Simple Guide
FAQ
What is the most successful options trading strategy?
A strategy that is successful for many investors is buying call options on stocks in which they already have a stake. If the stock increases in value, then their call option will increase in value as well.
A potential downside to this strategy is that there are no guarantees that the stock will increase in value and an investor may end up with a loss on both the stock and the call option.
What is the best option strategy for beginners?
The most common and easiest stock options trading strategy for beginners is the long call. This strategy entails buying a call option on a stock that you think will appreciate in value.
If the stock does increase in value, then you make money on the trade because of your long position.
If it doesn’t increase in value, then you lose the amount of money that you spent on the trade. It’s called buying to open. The other major options trading strategy for beginners is the covered call.
Conclusion
In summary, what has been discussed above are a list of different strategies for trading small portfolios: trading one or two stocks, diversifying by industry, investing in a low-cost ETF or index fund, and options trading.
All of these methods have advantages and disadvantages, so the best choice depends on your individual circumstances. I recommend you try them all and find out which suits you best.