I asked 5 traders what would they do if they had to start all over again with just a $2,000 account and you’ll find it very interesting what they shared.
But first, let’s meet the traders…
Ophir Gottlieb – CEO of Capital Market Laboratories. Generates visual art out of derived ratio computations on performance data, fundamental financial data, accounting data, stock price data and other relevant information.
Kirk Nathaniel – Founder and Head Trader of OptionAlpha.com. Helps investors to consistently make smarter, more profitable trades.
Steven Place – Founder and Head Trader of InvestingWithOptions.com. Believes that anyone can use options to get the results they desire. Whether it’s having more money for retirement, or to aggressively grow your accounts and trade full time…
Sang Lucci – Founder of SangLucci.com. Provides an unparalleled depth of knowledge via access to top industry professionals hand selected for their commitment to transparency and exceptional, sustainable trading.
Tim Sykes – Self-made millionaire stock trader, entrepreneur, and penny stock expert. He is best known for turning his bar mitzvah money into over $4 million by day trading in-between classes at Tulane University.
The question:[feature_box style=”15″ only_advanced=”There%20are%20no%20title%20options%20for%20the%20choosen%20style” alignment=”center”]
Here’s what they have to say…
I would say first of all ignore the idea of finding the smart money with order flow if you only have $5000. So I would just drop that strategy from the repertoire at the beginning. That doesn’t exist right now.
You’re going to try and do volatility trading and the way to do volatility trading without having a large margin is the spread so you’re always selling as many options as you’re buying. You’re certainly not selling more options when you’re buying. Then what I would do is I would start looking for differences in skew.
Let’s say it’s a $30 stock and the 32 call is priced at 50 vol. The 33 call is priced at 70 vol and the 34 call is priced back at 50 vol. OK. Well, something seems wrong there.
Make sure it’s not a takeover at $32 or something. Make sure it’s not something obvious and then start making trades based on discrepancies and skews. It’s actually very visual. You will actually see a kink in a chart. I would start trading that and before I would do that, I would probably make five, six trades.
Say, “I would have done this trade. That’s what I would have done. Let me see what happens.” Understand why you would have won or lost then I would start making those trades. I don’t think there’s a whole lot other trades that would do with that sized account. Just buying options …
Buying or selling spreads, yes. I would walk along the skew. Whether or not you want to be someone who owns deltas or short deltas, that’s – it actually turns out to be very personal.
Some people like to own things and some people like to sell things. I like to sell things but whatever it is, look for opportunities. If you’re doing call spreads and you’re buying the low strike and selling the high strike, fine.
You’re owning deltas. If you’re doing put spreads, then maybe you’re doing the opposite but I would start with skew trading. I would start with relatively close strikes and I would not make a trade more than 50 cents and not more than 10 times so $500 or less.
I would say if you’ve got $5000, you need to put at least a thousand dollars in the cash just for now because that’s a small amount of money. You could easily ratchet up a bunch of trades with that type of capital. So, yes, maybe put $1000 away for right now just in cash so you have money in case the worst happens.
After that, I would tell people to go after credit spreads. You don’t really have the account size and really you shouldn’t with $5000 be going after any type of positions that require a lot of margin.
So go after positions that have defined risk, credit spreads, some butterflies, iron condors, things like that that have really defined risk and make those types of trades.
Make the consistent winner so you get on a really good path from the beginning. You make some slow, consistent profits. You’re not kind of hitting it out of the park with some home runs.
I would just divide it up on those spreads that I trade a $500 requirement because they’re on the indexes and they’re a five-point spread on the strikes. So if you can even devise it up, a couple of $500 trades and then you break it down to some of the smaller indexes; and if you can break it down in the $100 positions or $200 positions.
Small lots all over the place just so you get a feel of how things are going. You don’t want to have your money in one position, in one trade or even in four trades. Really, four trades on the same index at the same – right around the same area probably is not the best idea.
I would definitely put $1000 away so that if I really screwed up, I have some money to come back to and start building up an account again. But yes, if I just had $5000, I would absolutely do credit spreads first.
That would be my sole focus.
Defined risk, no fluctuations in margin and the ability to generate some pretty good income. I would spread my portfolio among different indexes and 24 different strike prices and different expiration months and really diversify things that way.
I would do a 50/50 split so I’d put a grand in two sets of strategies. I am assuming with $2,000 you’re trying to leverage up and you’re trying to make significant returns on your capital.
When you try and leverage up and you try to make returns 100%, 200% it becomes very difficult because you are now hamstrung very specific set of strategies and you are limited pattern for rule when you get three trades a week that are day trades.
The first thousand I would focus on income trading, I would focus learning how to put on slightly non directional spreads, such as iron condors or butterfly’s to help generate that cash flow.
That’s not a trade where you’re going to make a lot of money on an annual basis. That is a trade where you should be pulling out about five to ten percent a month on that kind of capital base.
If you are trading with twenty million dollars and you are trying trading liquidly risks becomes a big risk and so on. The second I would learn how to trade momentum on very very liquid names, you need to stick with the same fifty names over and over and you need to see how those patterns trade and look for ways to be a net buyer of options.
We could consider where you are trying to make that significant return on your risk. This is not recommended by
a lot of people but to be honest if you are trading with $2,000 you are not looking for five percent you are looking for 250% which is possible its very very low odds with that.
That’s what I would do with those momentum trades you have to be incredibly reflective do not try and stay in the market do not over trade and the biggest currency that you would have are those re trades, those three days trades that you get.
I would take my $2,000 and I go to a prop firm and I would start just like how I id and I would understand tape, understand what’s working and I would allow them to give me the leverage and so I could try to scratch out a living until I understood how to trade.
Prop firms are great place to start with a small account, $2,500 to $5,000 so you understand what the hell you are doing while your trading and then you can go out and start branching into other strategies.
If however I didn’t have that choice what I would be doing is I would be swing trading options so let’s say I have a $2,500 account as you said I would be looking for a week, two week plays, I would be looking for credit spread trades, things like that.
Soft things to build my account towards $10,000, $15,000. Because stating with $2,000 and getting to $25,000 was one the hardest you will ever try to do.
Some people can do it quick, most people it ain’t going to happen, it’s not going to happen unless you put the time in, you put the effort in and you grind it out and you’re smart about it.
Once you have $25,000 to get to $100,000 or even to get to $50,000 it’s 10 times easier than starting with $2,000 and trying to get to $10,000. The first ten is the most complex and once you get there then you can get a little bit more flexible with your strategies. But don’t try to concur the world as you soon as you get started.
I would be patient and I would look for longer term trades, trades my losses are minimized because again we are talking about capital and conserving because you only have $2,000 – $2,500. You really have to be smart with your selection of trading styles. You can’t go gun ho and use weekly and try to hit Priceline for ten times your money right away. You can’t do things like that.
I have a lot of people starting with five, ten, fifteen thousand and it’s pretty much same answer where you need obviously be more aggressive with a smaller account. There are people that oh don’t use more than ten percent of your portfolio in any one asset. Well fuck that, I’m not going to try to invest $500 to make $100 like that’s not
even worth my time.
With $5,000 or $12,000 what I always do small account is just go aggressive and I watch the stock very carefully whether I am long or short and I’m trying to make 20 or 30 percent and I am investing 50 to 75 percent of my assets. So on a $5,000 account I’ll invest $4,000 and I’ll try and make like $500 or $700 on that trade in a few days and
then move on.
If it’s working out then that’s great because then you are trying build your account $500 at a time ideally. Sometimes you’ll do better make $1,000 sometimes it won’t work out and you will have to cut your losses very quickly.
If you are going to be that aggressive big position size like that you need to be very very obsessive cutting losses, you cannot afford to lose $500 or $1,000 because it’s like candy land you can’t go backwards.
It’s about building your account and once you get up to twenty-five or fifty thousand depending on the person and how risky you want to be, you can start pulling back your position size and just saying look I want to make two or three thousand here in a day rather than trying to make ten or twenty thousand.
But it’s different for everybody that’s makes trading teaching kind of fun and difficult. But you definitely to go for it because even in the real world you can become a part time server at Starbucks to make five thousand back in a
few weeks or maybe a few months at Starbucks.
There are ways to make that money in the real world versus if you are trading two hundred thousand, you lose a hundred thousand, good luck trying to make back a hundred thousand in a few weeks. I don’t recommend being like a drug dealer or something. It’s not as easy so with a small account I would aggressive.
If you want to hear the full versions of the interviews and pick the minds of these market crushers, you can access them below