Trading calls and puts with a small account trick
I wanted to walk you through a small account strategy you can use for swing trading that will help you from also losing large amounts on a wrong trade.
When looking at a stock chart and trying to find break out points the idea is obviously to buy into the breakout and sell before the retracement. So, if you feel a stock is going to be breaking out from a potential squeeze or other indicator, you can look a few months in advance (30-120 days) and look for Delta .50 options to trade. They should be very close to the actual stock price so if a stock is trading around $55 the June expiration $55 call should be around the Delta .50 mark. The benefit is this will cost you a couple hundred dollars with limited risk rather than $5500. What this will do is give you near exact profit or loss based on the stock movement so if you were to purchase 1 contract the P/L should be very close to what it would be if you were to buy 100 shares. This is a good strategy for those with small accounts or don’t have margin available at your disposal. Always remember, the more in the money the better if Theta (time decay) isn’t a big factor yet.
After you pin point the break out stock and purchase your contract you can then scale into the trade further by buying 1 more contract as the stock begins the breakout you anticipated. You now will see P/L based on 200 shares of the underlying stock just like you would if you were to have purchased another 100 shares of the stock at that point. Now, if your trade continues to run and becomes very far in the money, you can always move the strike price up to the nearest .50 delta to continue the run.
This is a strategy that we have used in the past and are starting to implement more today based on the choppy market we are seeing. This gives us an opportunity to play breakout moves but to protect the account from a big loss in case the trade doesn’t go our way.