$1000 Starting Capital

Wallboy said: "Hello there, I'm feeling up to a challenge by starting with $1000 in risk/speculating options capital and I'm looking for options strategies and/or a system that would suit this low starting amount. Commissions will be a big contender to deal with as I plan to keep each trade around 10-20% of the entire $1000 and commissions will eat up a lot of that. Some strategies that I've thought of: Basic Call/Put Option I know short-term options offer more risk then longer term, but the longer 4+ month options cost more cause of the time value unless buying way OTM. The longer term options could eat up more then 30% of the entire $1000 in a single trade. So for a straight call or put, which would be better? More expensive long-term option or the cheaper short-term option? Straddle/Strangle I also liked the idea of playing Straddle/Strangles on companies about to release earnings. Let the winner run and toss the losing leg. Now if earnings come in right at expectations then the stock and it's options may not move really at all and I'd lose on that. On top of that paying commission for both legs of the strategy will take a big chunk out of the trade. I plan on using a stop loss or trailing stop of 30-35% should the trade go the wrong way and will change it need be for each particular trade. If anyone has some advice or other strategies they think would make best sense for this low of starting capital, such as a debit/credit spread strategy, etc, please post away and let me know. Thanks. :th_coolio:"

drdan said: "For that low of a starting capital I believe your only method of choice is short term way out of the money options on an index such as .10 and then wait for the option to get to .15 or .20. So you need to really examine the indexes choose one - QQQQ's are the most likely choice for this strategy - and when you think a bounce is coming one way or another buy that direction. When the move comes sell the position for a 50% to 100% profit. Also the best tip I can give you is to study up on trading by volatility. Buy when volatility is low sell when volatility is high. For example instead of your straddle/strangle technique which usually does not pan out too well. Try buyin a call on low volatility two to three weeks prior to earnings and then sell that call on high volatility the day before earnings or the day of if earnings are due out that evening. To help with commissions you may want to try [url]www.thinkorswim.com[/url], low commissions on trading a few contracts, but an excellent broker for options. Hope this helps, go ahead and ask anything else. OH, one other thing. I started trading options with $2000 TWICE! I lost the first within 6 months. Good luck!"

Rickster said: "I am in fairly close agreement with Doc, as usual. I would recommend weekly swing trades on just out of the money, near month options on the QQQQs, shooting for 50 and 100% gains. As a general rule, I risk 2 to 5% of my capital on a given option trade, but you may have to start higher than that to avoid being drained dry by fees. If you get off to a lucky start, you might end up ok. Otherwise, expect to be looking for another $1000. An intitial stop loss of 30 to 35% might be a little too tight, depending on how good you are at timing your plays. The bid ask spread alone can be a big chunk of that. This is where trading highly liquid options like the QQQQs becomes important because the bid ask spread is relatively small on the Qs, and you can help this situation by setting your limit orders in the middle of the bid ask spread. They will usually execute ok there."

Wallboy said: "Thanks for the comments. I've started looking into volatility trading and how IV Crushes can have an affect on a straddle/strangle on earnings announcements. As for as trading on the QQQQ's, you guys recommended trading the .10 calls/puts near term options and waiting for a .05-.10 tick and sell for profit. But if things DO go wrong it's practically 100% loss in a single tick at that cheap of an option. Wouldn't it be a little safer to go more ATM short-term and buy a call/put between .50-$1.00? Or do you think the smaller gains from those won't make up for the commissions? Thanks again."

drdan said: "Nope I think your smaller gains will not make up for your losses. It is all about capital preservation especially starting at $1000 actually starting at anything less than $5000 is pretty crazy. I know I was there when I started I thought I could do it with a small cash outlay. Now $5000 is a small cash outlay but five years ago it wasn't for me. Also buying an option at .10 has a much much greater likelyhood, if you are right, to get to .20 or a 100% gain than a $1.00 option. The trades that Rickster and I are talking about will last you about 3 days maximum if you have the correct timing down of the index and an understanding of volatility trading. Have you traded options before? Even just paper traded? Options move very fast. Your $1.00 option can be down to .20 in a blink of an eye even with your stop loss there is no guarantee you will be stopped out. SO looking at capital preservation... buying 10 .10 options will cost you $100 plus commissions buying 1 $1.00 option will also cost you $100. Now lets say you are wrong in your trade your $.10 option can be a total loss you lose $100. Your $1.00 option goes down to .20, are you going to sell to get out of that option? Well then after commissions it is a 90% loss not much savings. At the level you are playing 100% losses are acceptable and expected. Now lets look at if you were correct because that is what we are going for here. You need to only focus on winning and let your money management rules focus on the losing trades, meaning do not worry about your losses. Focus on your winning trades. You are correct and the index goes up causing your options to increase in value. The $1.00 option goes up .20 to $1.20 a 20% gain however in that same option chain your .10 option can go up .10 half as much of a monetary gain but percentagewise you are now looking at a 100% gain not a 20% gain. It is about risk vs reward (see Zster I can say it!!) Your statement is very correct in playing closer to the money options, preferably in the money options, are much less risky but at the level you are playing it just does not make sense, you still incur the large losses and make nothing in gains. Even if you had three good wins of 20 to 50% one large 90 to 100% loss will crush you and your 30% stop loss will also crush you because 30% can just be noise in an option. There are times that you would get out right before the option skyrockets. If you were playing with more capital and you were playing with in the money options 30% would be fine, I prefer 40 to 50%, but that is what I am willing to risk at the experience level I am at. The trading strategy we have given you is not something I recommend it is too risky I would much rather see someone have more capital and play by safer rules. Occassionally I will still play this strategy but it is definitely more like gambling and I am totally in all the way swinging for the fences and going for 200 to 300% gains while risking the 100% loss. I use a very small amount of capital, but can make $300 to $600 in a few days."

Wallboy said: "Thanks, Yes I have paper traded and used some online simulators to test different strategies starting with $1000. I've tried straight calls/puts paper trades with companies that I think will and did gap on earnings and had between 200-700% profits depending on how far OTM I went. Now when I was wrong on which way it would gap it was pretty much 100% loss, but the few I was right on skyrocketed. Would this be a similar risk as trading far OTM QQQQ's, but with even higher possible returns? I understand it's going to take a definate gamble at this low of capital, but the $1000 i'll be using is completely risk capital and no biggie if I lose it. Just really trying to get a system to work for it."

drdan said: "Yes very similar to trading on earnings with one difference. The QQQQ's would be more predictable in a sense. Playing earnings truly is like gambling, because the earnings could be just like you thought however the CEO or CFO or some other higher up can say something about the future of the company that the market does not like and instead of going up it comes crashing down, or the earnings come in great but the market already had it priced in and the volatility comes down but the price does not go up verey much. So it is like a coin toss. Vs playing the indexes, if you know how to read charts and read market sentiment you can be more consistent and then just get dinged a couple of times on bad news or misreading of the market."

Wallboy said: "Yeah thats true, When I do look to play earnings, I check to see if the stock has a history of gapping on earnings enough to offset the volatility crush that comes after. I look into both fundamentals and technicals as well to see how they look and how the sector overall is doing. Right now I'm doing a paper trade of the Dec 06 QQQQ 46.00 Calls @ $0.10 to see how that works out."