Brokerages have changed significantly over the past 20 years. Aspiring traders with small accounts now can participate with much smaller accounts than in the past.
When first thinking about trading, most if not all traders start with stocks. However, the cost of buying shares to trade can quickly use all of the cash in a small account. I consider a small trading account as one of $5000 or less. There are a vast number of interested traders with accounts of $500 or less.
These traders quickly find out that they have to trade leveraged assets to have an ability to trade at all. This pushes them into assets like futures, forex, and options. You can learn to use options with a small account and limit risk in trades.
Many changes have taken place that has made trading options less costly, including free. There are now ways to limit risk that make it very easy to start trading with accounts of less than $1000.
These are a few of the most significant changes that have helped change the playing field for the retail investor.
In the past, the typical brokerage would charge an options trader a ticket charge (minimum) per trade PLUS a fee per options contract. While this is still a widespread practice, most if not all brokers offer commissions based on a per option charge only. If you are paying a ticket charge, you should call your broker immediately and change to per option only.
Paying over $1 per option is too high.
Tastyworks offers a commission structure where you only pay to put on a trade and not to close it out, which can save you even more money over time.
Robinhood is an online broker offering no commissions to trade. Their trading platform is terrible. You need to spend some time learning it, but you can trade and not pay any commissions to do so.
As of this writing, I opened an account and funded it with $100 and am making trades. The bottom line is that commissions should no longer be a hurdle in getting started trading since there is no cost to overcome if you use a broker like Robinhood.
One of the basic strategies options traders learn and begin with is credit spreads. These are high probability trades that are out of the money.
When I first started trading spreads, the strikes were 5 points apart. This meant that I would need $500 per trade minus my credit to trade one spread. Even in a $5000 account, you can't trade many of these every month as each trade would take up 10% of the account value.
Today there are many stocks with strike widths of 2.50, 1.00, and even .50. The margin needed for an options spread with 0.50 strike separation is $50 minus the credit you received. You can see how this would make trading and risk much easier when you are going into a trade with $50 vs. $500. It is a huge advantage for traders today.
When I started trading back around 2000, I could only trade options that expired every 30 days. This limited the amount of turnover or trades I could make. You can open and close trades within that period as much as you want, but it does limit the choices you have.
Today, a large percentage of stocks and indexes have weekly options that provide more bang for the buck in the shorter expirations due to how Theta decays. If you don’t like one option contract that is expiring soon, you can look to the next weekly out in time or the next. The choices are much bigger today providing opportunities that just didn’t exist with only monthly expirations.
Putting is all together – A comparison of two spreads
The old: Commission of $6.95 per trade plus $1.50 per option.
- 5 dollar WIDE SPREAD WOULD COST $13.90 + $6 = $19.90 to enter and exit a trade plus $500 of margin. The cost alone is 4% of the margin that would have to be over come by profits.
The new: Zero Commissions
- $1 dollar WIDE SPREAD would require just $100 to trade minus your credit. That’s it!
One typically overlooked advantage of small width spreads is that the ROI tends to be better the smaller the width is versus trading wider spreads. This isn’t always the case but typically holds true and is worth investigating.