Last week, a trader came in and bought 128 Targa Resources Corporation (TRGP) $130 June calls for an average price of 27 cents apiece when the stock was trading at $126.59 a share (options expiring in one day).
What made this order so amazing… was a minute later, a story came out that Energy Transfer Equity (ETE) was near a deal to purchase the company. TRGP popped to as high as $160.97 a share off the story.
Oh yeah, I forgot to mention, this all happened less than two minutes before the closing bell.
The trader spent a little more than $3,500 on the trade… and if they sold stock on the spike…let’s say at $155, they would have made over $320,000 in profits in about one minute!
On June 19, the day of this trade, TRGP had 3.8 times usual options volume. Just another reason why you should be following unusual options activity—because you never know when the next explosive stock move will happen.
However, there is some downside to sharing these types of stories with you.
You see, ever since I started OptionSIZZLE.com back in 2008, a week doesn’t pass by where I receive emails from small investors who want to get involved with options…hoping to have their own TRGP success story.
Now, I understand that we all have to start somewhere, however, trading is very difficult and there is a learning curve involved.
Heck, I lost over $2,000 on my first option trade (which was a lot of money for me at the time).
With that said, you need to have a proper “bankroll” to be able to absorb losses, identify what works and what doesn’t.
For many new traders, your goal in the beginning should be not losing money…forget about being profitable off the bat.
This is where you pay your dues.
For most, figuring out what makes you comfortable…requires trial and error. In addition, you’ll need to gain experience in how to execute orders while limiting slippage costs.
Again, this is all part of the tuition costs for participating in the markets.
If you’ve got a small account, these costs can really burn through your cash.
Not only that, but according to FINRA rules, if you execute four or more option day trades within a rolling five business-day period (on a margin account), you’re labeled as a “pattern day trader.”
If you’re a “pattern day trader” you must have at least $25,000 in your account and can only trade in a margin account.
Now, trading unusual options activity is a numbers game. On any given day, there might 1-5 good looking opportunities.
However, if you’re limited to only a couple of trades per week, trading the strategy is very tough.
There is no way to figure out which trades will be a “home-run” and which ones will be an absolute dud. After all, if I knew, I would only take winning trades. Unfortunately, it doesn’t work that way.
And you know what else?
Some brokers don’t want to hassle with new traders with small accounts. They’ll restrict certain types of tiers or levels.
For example, a relative of mine with two years of stock trading experience wanted to open a tier 2 options account with $70,000.
A tier 2 option account allows you to create spreads, purchase options, write covered calls, write covered puts and write cash-secured puts.
If you ask me, none of the above option strategies are reckless.
In fact, they’re pretty standard in my book.
Basically, you’re not “approved” to execute some of the strategies that offer great risk to reward… like butterflies and credit spreads. Really strange because in many cases these can be high probability trades.
The brokerage house will claim it’s their fiduciary responsibility and it’s for your best interest not to have access to these higher levels of trading.
If you ask me, a small trader doesn’t generate enough commissions for them and they don’t want to increase their risk management staff.
A big account just means you can lose more money if you don’t know what you’re doing. But I guess that’s OK, if that big account generates commissions and can “afford” to lose.
Of course, all of this sucks for the trader who has a small account.
Can You Still Make It Work If You Have A Small Account?
The answer, yes!
However, the odds are heavily stacked against you.
For example, let’s say you had $5,000 trading account and you employed proper risk management…you’re average position size might be $100.
Most people wouldn’t get overly excited if they made $30 on a position (30%) because it’s not a lot of money. Too many of them want the fast money…and because of that, they might take on too much risk for their account size.
Trading a small account requires a great deal of discipline and a level head.
Many small traders blow out their account because they try to push it too hard, which I think is necessary.
You need to learn how to lose, before you can win
What about the psychology factor?
The new trader with a small account might not be able to keep their emotions in check—causing them to churn their account.
One way to get around the “pattern day trader” rule and gain high “level” options trading clearance is to join a proprietary trading firm. Some of these firms have the proper risk management in place to accept all option strategy types.
In addition, they offer some of the most competitive commission rates in the industry…and you might be able to trade remote as well. The only downside is that you’ll have to register with a prop firm, pass an exam and get licensed (series 7 or 56).
Another possible solution is to use that small amount of capital and create a business that will give you cash flow today and in the future.
I actually invested into a business opportunity last year to create another avenue of income for myself… because I believe to gain wealth, you need more than one stream of revenue working.
Don’t get me wrong…I love the financial markets and will always be active in them, but solely depending on the market to create a living can be a risky proposition.
The opportunity involved selling a product on Amazon and it creates me passive income (with less than an hour per week of my time).
I took a $1,000 investment…which has grossed over $60,000 in sales…and this year we are on pace to beat last year’s sales numbers by 100% and exceed over $120,000 in sales.
Pretty exciting right?
You don’t find consistent trades like that in the market every day.
And what else?
I’ve actually created a course that is in beta… and have had 25 people go through the material.
If you have a small account, I would suggest maybe trying to build something like I did on Amazon–to create revenue and capital for the future—so you can build a large of “bankroll” to give yourself and honest and fair shot at being successful trading and investing.
Bottom line, the odds are stacked against you if you have a small account. As much as I would love for you to have the next TRGP type trade…it’s not a realistic expectation.
However, I do believe you have some viable alternatives to get you into a position to succeed.