Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to go through my little unconventional guide to trading options with $500. Everyone always ask and we get a lot of emails from people saying, “How much money do I need to trade options? Can I trade options with $100? Can I trade options with $500?” And the simple answer to this is of course, you can do it. If you have a brokerage account and you have the ability to trade options, it can be done. Now, we always suggest (for full disclosure) that you start with somewhere around $3,000 to $5,000. The more money that you start with, the wider the opportunities you’re going to have to trade more positions, diversify your portfolio, get into additional legs of underlyings and it’s going to be a dramatic improvement on your P&L with your ability to trade more contracts.
But if you are starting with $500, here's what I suggest you do. I suggest you start trading options on stocks that are really low-priced ETFs. When I actually go into my list here at the toolbox and I vertically sort it by lowest stock price, I can see that there’s a couple of ETFs that jump out as lower-priced ETFs. Now, why do I say lower-priced ETFs and not stocks? Because I think that when you’re trading with $500, you want to be really careful about what you’re trading and you want to get into a good framework of trading consistency and trading mechanics and that's going to be done a lot better on underlying ETFs than it is on stocks which could have huge moves in either direction. ETFs are going to be a little bit more stable generally, have a little bit less volatility than stocks and so, it’s going to be better as you start to get your numbers up quickly.
The ones that you want to focus on are ticker symbols like USO, SLV, UNG, GDX, OIH, XLF, XOP, etcetera, all lower-priced ETFs. And the reason that you’re going to focus on those is because in many cases, they offer $1 wide strikes and in some cases, they offer half-dollar wide strikes. USO is commonly a half-dollar wide strike ETF which means that you can trade say the 14 call options and the 14.5 strike call options. And so, the reason that this works is because as you're starting trading with just $500, you want to trade as small of a spread width as humanly possible because your goal is just to start to get more trades on, start to increase your trade frequency. And so, although it might be tempting to trade really wide and really big positions, you actually want to start insanely small.
In the case of USO, you could at this point, sell the 14 call options and buy the 14.5 call options and if you were to do that, you’d take in about a $.10 credit and since it's just a half-dollar wide strike, your risk is about $40. That's not including commissions, obviously, so you got to factor in your own commissions. But your risk is $40 and your potential profit is $10. Now, again, you're not going to quit our job on this. You're only trading with $500. But it really starts the process and gets the wheels in motion of how you can start trading with just $500 because $40 although is probably higher than what we would typically like for your overall allocation at 5%, it's about 8% allocation. It’s about as close as you can get with $500 to start trading. That's why I say it’s my unconventional guide because I think most people would say, “You know what? Go. Shoot for the moon. Buy a bunch of options. Start trading all over the place.”
I see this all over the place on Facebook and YouTube and Twitter right now with Robinhood. A lot of people are opening up these small accounts, $200, buying some call options, trying to get lucky. A lot of people are blowing up their accounts and starting and they’ll never come back. Do it the right way. Trade it very, very small, very tight spreads. Keep your risk contained and you should be okay and start adding more capital to your account when you get a chance. As always, hopefully you guys enjoyed this. If you have any questions, let me know. Until next time, happy trading.