Trading Options in a Small Account | tastytrade Webinar

Name: Trading Options in a Small Account | tastytrade Webinar
Uploaded: 2025-10-30T13:15:55.000Z
Duration: 1 h 54 min 26 s

Welcome to the Tasty Trade Small Account Smart Moves Webinar

Introduction and Overview

The webinar is hosted by Quentyn from the trade desk, alongside Anthony, a team lead on the trade desk.

Christian and Andy are present in the chat to assist with any questions during the presentation.

The focus will be on strategies for trading smaller accounts and practical demonstrations using the Tasty Trade platform.

Disclaimer

All trades discussed are for example purposes only; they should not be considered as financial advice.

Emphasis on self-directed trading; participants are responsible for their own trading decisions.

Defined Risk Strategies

Common strategies for smaller accounts include defined risk spreads such as vertical spreads (put/call credit/debit).

Iron condors will also be covered, particularly using Netflix as an example.

Vertical spreads and iron condors are frequently requested by customers calling into the trade desk.

Alternative Strategies

Discussion of less common strategies like broken wing butterflies (to be demonstrated with GLD).

This strategy combines elements of both debit and credit spreads.

Calendar spreads will also be introduced, likened to a poor man's covered call or synthetic covered call.

Calendar Spread Explanation

A calendar spread involves buying a longer-dated in-the-money call option while selling a nearer-term out-of-the-money call option.

This setup mimics a covered call strategy through its structure.

Trading Flexibility and Requirements

To execute defined risk strategies, traders must have a margin account; no minimum account balance is required beyond sufficient buying power for trades.

Customers often express surprise at the flexibility offered by Tasty Trade regarding options trading without strict account minimum requirements.

Benefits of Defined Risk Strategies

Lower dollar amounts at risk make these strategies attractive to traders with smaller accounts.

They allow speculation with limited financial exposure while maintaining defined risk parameters.

Understanding Option Spreads and Their Risks

Key Benefits of Option Spreads

The initial amount invested in a trade is accompanied by a defined maximum loss, allowing traders to know their potential profit and loss upfront.

Capital efficiency is crucial; option spreads enable traders to maximize their investment, allowing smaller accounts to engage with higher-priced stocks.

Many customers express the need for liquidity or additional funds when trading options, but using debit spreads can provide cheaper directional exposure.

Buying a spread instead of a single option reduces capital risk while still maintaining the same market assumption, although profit potential is limited compared to outright options.

Risks Associated with Defined Risk Trades

Defined risk trades result in either max profit or max loss at expiration, limiting adjustment opportunities during the trade's life.

If multiple contracts are involved in a spread, outcomes tend to be binary—max profit or max loss—at expiration without intermediate results.

Early assignment risk poses significant challenges; if an option is deep in-the-money near expiration, it may lead to unexpected margin calls.

Managing Assignment Risks

While early assignment can trigger margin calls, closing out positions can mitigate risks. Help center resources are available for guidance on handling such situations.

Anthony emphasizes that early assignment isn't catastrophic; staying vigilant about option expirations helps manage this risk effectively.

It's essential not to delay action after receiving an assignment notice; waiting too long could lead to losing the long option associated with the position.

Conclusion on Trading Options

Closing out shares and managing assignments properly ensures that defined risk remains intact. This includes understanding commissions and fees associated with multi-leg strategies.

Understanding Trading Strategies and Risks

Trading Higher Priced Products

Trading higher-priced products can lead to either maximum profit or maximum loss, emphasizing the importance of risk management.

It is recommended to trade out-of-the-money options to mitigate risks associated with early assignment when options go in the money.

Futures Trading for Smaller Accounts

Micro futures are popular among smaller accounts as they provide access to higher leverage products without needing a large capital investment.

For example, trading MEES contracts requires only $2,500 compared to $25,000 for standard ES contracts, offering greater flexibility.

Benefits of Futures Trading

Futures allow for uncorrelated positions; traders can diversify by trading commodities like corn and gold alongside stock indexes.

The futures market is not regulated under the Pattern Day Trader (PDT) rule, allowing more frequent day trading without restrictions.

Risks Associated with Increased Leverage

While increased leverage can amplify profits, it also poses significant risks including larger-than-expected profit and loss swings.

Understanding how to use leverage wisely is crucial; it can be both beneficial and detrimental depending on market conditions.

Margin Requirements in Futures Options

Span margin requirements may exceed defined risk positions; for instance, a $500 max loss could require a margin of $600 due to volatility assessments.

There are 16 different risk arrays that determine margin requirements based on worst-case scenarios for each position.

Commissions and Fees in Multi-leg Options Strategies

Higher commissions and fees are associated with futures and multi-leg option strategies; traders should factor these costs into their overall strategy.

Understanding Multipliers in Futures Options

In futures trading, multipliers affect pricing; for example, an option priced at $1 has a multiplier effect that changes its actual cost significantly compared to equities.

Understanding Futures Trading and Account Requirements

Key Concepts in Futures Trading

Futures trading does not require the full $100; understanding multipliers is crucial for traders.

A margin account is necessary to trade futures, with access depending on trading knowledge and investor profile. No minimum requirement exists unless in an IRA, which requires $25,000 for standard futures and $5,000 for micro futures.

Leverage can be beneficial or detrimental; it's essential to understand its implications before placing trades to maximize profits or minimize losses.

Risks and Considerations

Be aware of wider spreads in futures options compared to equities due to lower volume in some products.

Liquidity risks vary among futures; highly traded options like equity indexes are more liquid than less popular ones such as agricultural products.

Defining Risk Through Trade Examples

Trade Efficiency

Comparing a short put versus a put credit spread illustrates how selling a put collects credit while requiring significant buying power (e.g., $3,800).

A put credit spread involves selling a 275 strike put while buying a 265 strike put, capping potential loss and reducing required buying power to about $841.

Benefits of Defined Risk Trades

Capping risk allows traders to diversify their accounts by enabling multiple trades rather than tying up most capital in one position.

Navigating the Tasty Trade Platform

Getting Started with Trades

The Tasty Trade platform offers both web and downloadable desktop versions for executing trades efficiently.

An example using Tesla will demonstrate how to execute a vertical spread on the platform, focusing on expiration dates close to 45 days out.

Trading Strategies for Tesla and Amazon Options

Analyzing Tesla's Recent Performance

The discussion begins with accessing the option chain for Tesla, indicating a focus on trading strategies.

Observations reveal that Tesla is approaching all-time highs after a recent dip, suggesting volatility in its stock price.

A bullish call debit spread strategy is proposed as a potential trading approach for Tesla options.

The high cost of calls is highlighted, which may deter traders with smaller accounts from participating in direct trades.

The benefits of using a debit spread are discussed, including reduced buying power requirements and capped risk.

Understanding Risk Management in Options Trading

Comparison between buying a single call option versus implementing a debit spread emphasizes the importance of managing risk effectively.

A scenario illustrates how significant capital can be tied up in one option trade, stressing the need for more consistent trading strategies.

The process of placing an order for the chosen trade is demonstrated, showcasing practical steps involved in executing options trades.

Transitioning to Amazon: Exploring Credit Spreads

The conversation shifts to exploring credit spreads with Amazon as another trading opportunity following the Tesla analysis.

It’s noted that Amazon has upcoming earnings, which could influence market behavior and trading decisions.

A humorous acknowledgment of being too engrossed in market activities leads to discussing whether to make an earnings play or opt for longer-term strategies.

Strategic Considerations for Earnings Plays

Discussion revolves around selecting appropriate dates and types of spreads (call or put credit spreads), emphasizing strategic planning based on market conditions.

Market Trends and Options Strategies

Current Market Analysis

The market is at all-time highs, but larger tech companies are showing signs of lagging performance. Discussion revolves around whether to follow the trend or anticipate a reversal.

The expected move in the market is analyzed using options prices, indicating potential strategies for trading.

Trading Strategy Insights

A bearish strategy is proposed by selling a call spread, reflecting a mixed outlook on Tesla (bullish) and Amazon (bearish).

The suggested strikes for the call spread are slightly outside the expected move: selling 245 and buying 250 with a focus on safety.

Risk Assessment

Probability of profit for this strategy is approximately 80%, which indicates a high chance of success but lower credit received compared to more aggressive strategies.

Maximum profit from this trade could be $89, while maximum loss would be about $412, calculated as the width of the spread minus collected credit.

Execution Process

To increase chances of getting filled on trades, it's advised to lower the asking price incrementally until filled.

A vertical credit spread position in Amazon is established with expectations set for earnings.

Neutral Trading Strategies: Iron Condor Example

Introduction to Iron Condors

An iron condor strategy is introduced as an alternative that does not require predicting market direction; it can capitalize on neutral movements.

Trade Setup Considerations

For Netflix's post-earnings situation, discussions revolve around choosing expiration dates roughly 45 days out versus sticking with monthly options.

Strike Width Decisions

The choice between wider spreads (20 wide vs. 5 wide strikes) reflects considerations based on account size and risk management preferences.

Liquidity Factors

Closer expiration options tend to have more available strike prices due to their active trading nature; traders often hedge nearer expirations.

Finalizing Strategy Parameters

One standard deviation moves are discussed for setting up both calls and puts within the iron condor framework, focusing on liquidity at round-number strikes like 1200.

Iron Condor Strategy Overview

Understanding the Profit and Loss Graph

The profit and loss graph for the iron condor strategy on Netflix indicates a desired range between short strikes of 1,200 and 1,020. Staying within this "green zone" is crucial for profitability.

Visual Representation of Trades

A visual representation helps traders understand where their trades stand in terms of profit and loss. This graphical tool is essential for analyzing strategies effectively.

Personal Experience with Trading Tools

The speaker emphasizes that their familiarity with the platform allows them to visualize trades easily when customers discuss strategies, highlighting the importance of intuitive tools in trading.

Transitioning to More Complex Strategies

Executing Orders Efficiently

After placing an order at 120, adjustments are made to ensure a fill at 115, demonstrating the need for flexibility in executing trades efficiently. The activity tab is also mentioned as a resource for managing working orders.

Exploring Broken Wing Butterflies

Omnidirectional Aspects Explained

The broken wing butterfly strategy allows traders to potentially profit even if one side goes in-the-money; it’s designed to be more forgiving than traditional spreads. Max profit occurs when pinning at the short strike while still allowing some leeway on either side.

Profit Potential Despite Market Movement

Even if market conditions shift unfavorably (e.g., price drops), profits can still be realized due to initial credits collected from selling options within this strategy framework. This adaptability makes it appealing for traders looking to hedge against losses while maintaining upside potential.

Analyzing Trade Scenarios

Speculating on Price Movements

Traders can speculate on price movements using broken wing butterflies by targeting specific levels (like 378) while being aware that they can still earn profits even if prices do not reach those targets directly due to collected premiums from sold options.

Structure of Broken Wing Butterfly Trades

The structure involves a long debit spread combined with a wider short credit spread, which results in collecting net credit upfront—this unique setup provides opportunities both upward and downward in market movement scenarios.

Calendar Spread Strategy Discussion

Implementing Calendar Spreads

When considering calendar spreads, particularly for covered calls, selecting longer expiration dates (e.g., December 2026) is recommended alongside purchasing in-the-money options like an 80 delta call option around $545, indicating strategic planning based on market forecasts and risk management principles.

Understanding Synthetic Covered Calls

Overview of Synthetic Covered Calls

The discussion begins with the concept of mimicking a covered call by selling a near-term expiration call option after purchasing a longer-dated call option.

The strategy involves using options to simulate owning 100 shares of SPY, leveraging an 80 delta long option that closely tracks stock movements.

Financial Implications

Purchasing a long call option allows for significant capital savings; instead of needing approximately $35,000 for 100 shares, only about $17,000 is required for the synthetic position.

A traditional covered call on SPY would require around $68,000 in cash or margin, while the synthetic approach drastically reduces this requirement.

Benefits and Downsides

The synthetic covered call offers flexibility and lower capital requirements but has a limited lifespan (416 days until expiration).

If the short call goes in-the-money at expiration, it does not automatically exercise; management strategies must be employed to handle potential assignments effectively.

Position Management Strategies

It's crucial to manage positions before expiration to avoid margin calls and ensure proper handling if the short option becomes in-the-money.

This strategy allows traders without sufficient funds for outright stock purchases to engage in similar trading activities with significantly less capital.

Practical Application and Execution

When managing positions, traders can execute orders such as buying to close short shares along with their long options based on market conditions.

Rolling options can be done through trade pages or position tabs on trading platforms, allowing adjustments based on market dynamics.

Managing Options Positions and Strategies

Rolling Out Options to Avoid Assignment

Discusses the process of rolling out an option to avoid early assignment, emphasizing ease of execution with just a few clicks.

Introduces the concept of a "synthetic covered call," suggesting that this strategy is accessible to all traders, regardless of their financial status.

Understanding Early Assignment Risks

Highlights key considerations for assessing the risk of early assignment on short options, including whether the option is in-the-money and the amount of extrinsic value remaining.

Reiterates that understanding these factors can help gauge the likelihood of early assignment effectively.

Closing Positions Efficiently

Explains how to close out positions using Amazon as an example, detailing steps like selecting options and grouping by order chains for efficiency.

Describes how to adjust trade prices before submitting orders to close positions, noting there are no commissions for closing equity options trades.

Trading Fractional Shares

Mentions the ability to purchase fractional shares on the platform, which allows traders with smaller accounts to invest in assets like SPY without needing full share amounts.

Emphasizes changing order types from limit to market when buying fractional shares for proper execution.

Accessing Trading Resources

Provides information on where users can find additional resources and support related to trading strategies and platform usage at support.tastyrade.com.

Encourages users to reach out via chat or email for assistance with any questions they may have regarding trading or platform features.

Understanding Options Trading and Assignment Risks

Key Concepts in Options Trading

The discussion begins with a focus on Reddit's upcoming earnings, highlighting the potential for assignment in options trading. The speaker emphasizes the importance of monitoring specific columns like delta and open interest on trade pages.

The concept of extrinsic value (EXT) is introduced, which indicates the time value remaining in options. A small extrinsic value suggests that options are expiring soon.

Concerns about bid-ask spreads are raised, particularly when extrinsic values approach zero. This situation can lead to risks associated with early assignment of short options.

Managing Assignment Risks

The speaker warns against selling short options that are close to zero bid, as this increases the risk of early assignment. It’s advised to trade out-of-the-money options to mitigate this risk.

An example is provided comparing put and call spreads, illustrating max profit and loss scenarios while noting that in-the-money positions carry inherent assignment risks.

Emphasis is placed on ensuring that out-of-the-money options still have bids if a spread goes in the money; lack of bids heightens early assignment risk.

Strategies for Smaller Accounts

Smaller accounts may opt for vertical spreads using in-the-money options due to lower buying power requirements. However, this strategy increases the likelihood of early assignments.

Early assignment can lead to unexpected share ownership and margin interest charges, complicating financial management for traders.

Liquidity Considerations

The liquidity issues associated with in-the-money options are discussed. Wider markets can indicate less liquidity, making it more challenging to execute trades effectively.

A practical approach is suggested for handling shares once assigned: closing out shares or mimicking covered stock orders by selling long positions alongside closing option contracts.

Understanding Assignment Types

Questions regarding assignment types arise; American-style options allow for early assignments while European-style (like cash-settled products such as S&P NDX) do not permit this feature.

Traders are reminded to understand both their trading strategies and the characteristics of the products they choose before placing trades, especially concerning potential assignment risks.

Understanding Early Assignment in Options Trading

Key Concepts of Early Assignment

When trading options, particularly call spreads, it's crucial to be aware of the risk of early assignment, especially if the position is slightly in-the-money. This can impact your strategy significantly.

The value of options plays a critical role; for instance, an option with $8.50 in extrinsic value still holds potential even if it’s not far in-the-money. Understanding this helps traders manage their positions effectively.

Regardless of whether you are selling or buying a long call spread, there remains a risk of early assignment. Traders must always consider this risk when managing their positions.

SPX and Its Benefits

A significant advantage of trading SPX options is that they follow European-style rules, meaning there is no possibility for early exercise or assignment. This provides more flexibility and reduces certain risks associated with American-style options.

Upon assignment in SPX trades, transactions are settled in cash rather than requiring the closure of positions beforehand. This simplifies the process for traders and enhances liquidity management.

Conclusion

The discussion emphasizes understanding the nuances between different types of options (American vs European style), which can greatly influence trading strategies and risk management practices.