many Traders think you need a huge account to trade options but that's just not true in this video we'll share a powerful strategy designed for small accounts that can be traded overnight with minimal Capital I'm Jeff Holden and we're one of the top proprietary trading firms in the world with numerous seven and even eight figure perear Traders youve found the right place to learn hi I'm Seth freyberg and I'm the head Trad of S&B capitals options trading desk here in Manhattan and we're in touch with options Traders from all over the world some of whom are under the impression that you need a huge amount of capital to trade options especially options selling strategies but that's actually not true at all in fact there are a number of really solid options trading strategies for which your broker will only require you to put up around $200 or even less in many cases and that's what today's video is about we're going to teach you a really simple option strategy that you can trade in a small account and begin to get the feel for how how and why option strategies are so compelling without taking much risk at all before we get into the option strategy we'll be teaching you in today's video if you're absolutely brand new to options trading and you don't know much about how options work we put together a video for you to understand options Basics and if you click the video appearing on your screen right now it will lay out the groundwork for you to understand the option strategy that we'll be teaching you in this video Then when you're finished you can come back and watch the rest of this video okay so to illustrate how this simple option strategy Works we're going to show you an example using a stock with the ticker symbol of iwm which many of you may be familiar with it's an ETF an exchange traded fund which is comprised of a basket of stocks that mimics the Russell 2000 Index and as you can see iwm along with the rest of the market has been having a really strong year and in fact on Monday November 11th it closed at its high for the year at 24168 so let's say that on that day you pulled up an options chain that expired the next day November 12th and you sold a call option with a strike price as close as possible to the closing price which in this case would have been the 242 call and you sold one of those for 91 cents and then you moved over to an option chain expiring a week later on November 19th and found that same call strike price of 242 but this time you bought that option priced at 307 well when you do that selling a call at one strike price and then buying that same strike price call on a later expiring options chain when you do that you are executing what options Traders refer to as a call calendar spread when you execute this trade there will be a cash cost and we can calculate that by starting with the cost of the November 19th call which was 307 but remember each options contra contract represents rights involving 100 shares of the stock so you multiply that by 100 which results in you're paying $37 for the November 19th 142 call on iwm but then you sold the 242 call expiring on November 12th the next day for 91 cents which translates into $91 flowing into your account and so when you net out the option you bought from the option you sold you end up with a net cost of $216 so it's as simple as that to enter one of these call calendar trades now let's say that our strategy is to take the trade off for a profit just as soon as the trade is profitable by at least 5% of our initial cash trade cost well in this case being such a small trade 5% is about $11 and so let's move to the next morning to see where we are and so 15 minutes into the market the next day the stock would trading at 24175 up just a few Pennies from the previous day's close and so let's take a look at the pricing of the trade and so focusing first on the call we sold that 242 call expiring on November 12th you can see that its price had shrunk a lot actually from 91 cents down to 57 cents a drop of 34 but the call we bought expiring a week later on November 19th had all also shrunk but by a lot less by only 17 cents down to 290 and so if we wanted to close the trade at that point let's see what the outcome would be and with option spreads the way you close them is to Simply buy back the options you sold and sell off the options you bought and so if we do that as you can see we're able to sell off the November 19th call for 290 uh you can see that and we bought back the call we sold expiring on November 12th for $57 for a net cash proceeds of $233 which means that if you subtract out the initial trade cost we made $17 which is a 7. 8% profit on the initial Capital we had in the trade that $216 we initially put up to enter the trade and so in this particular case we exceeded our Target profit which will happen a lot with these trades incidentally these overnight trades now it's it's important for you to understand why we made a profit on this trade so that you can understand why calendar spreads work you see the stock opened up the next day and had not moved that much from the previous day and so you'd think the call would be trading for around the same price but remember the biggest risk for option sellers is that the stocks that they are derived from make a big overnight move adverse to our short option but this stock did not make a big move at all it barely moved and so and this is crucial to focus on the call expiring on November 12th will now expire at the end of the day and so the risk to us being the call seller in this case in other words being short the no November 12th call the biggest risk was that the stock would go way up overnight and we'd have to sell our shares of iwm for 242 even if the stock was trading much higher which means that we could give up a lot of profit on our shares because we'd be forced out of them at a much lower price if the stock rallied a lot overnight because having sold that call we are obligated to sell the shares at 242 no matter what so the original price that the market was willing to pay us for taking that overnight risk was $91 but now it's the next morning and the Stock's hardly moved and so when that happens the price of the call expiring that same day is going to shrink a lot because the overnight risk is gone and thus the risk to our being short that call ends in a little over 6 hours when the market closes so the market is just not willing to pay nearly as much for us to take that risk now that the over overnight risk is gone and so the price drops substantially down to 57 cents but think about it the option expiring a week later on November 19th you see that option still has a full week's worth of risk and so even though there wasn't a big move overnight the value of the call expiring on November 19th will will drop but by a lot less than the no November 12th call drop because there's so many days left so many overnights for the stock to possibly rally and give that call a lot more value because the more the stock rallies the more the call will be worth on expiration day all other things being equal and so that's why the call we bought only dropped 17 cents in value while the call we sold dropped 34 cents in value and so the key to understanding calendar spreads is to understand that the option we sell will always shed its value due to the passage of time faster than the option we buy because the option we buy has more time that it's exposed to Market moves than the option we sold and so now that you should understand why calendar spreads work let's move to the end of the day to set up the next day's trade and as you can see by the end of the day the stock had sold off closing at 23736 and so the closest strike price this day was 237 so we go ahead and we sell the 237 call expiring the next day on November 13th for 192 while the call expiring a week later which is in November 20th call that one costs $3. 49 because remember the market will always pay more for the same strike price option that expires later in time than the one that expires closer in time because the later expiring option has more time to become valuable here's the cost calculation just like we did for the previous trade and as you can see in this case the calendar spread costs less this day only $157 and these prices are going to change every day as the market prices ease trade a little bit differently depending upon how the market is assessing the upcoming risks for this stock particularly the overnight risks let's move to the next day and as you can see the stock opened up 173 and as a result both the call we sold and the call we bought were priced higher that day with the call we sold trading for 235 which is an increase of 43 cents in value but the call we bought had shot up to 411 which is an increase of 62 and while both of them increased in value which makes sense this stock went up right note that the one we bought has gone up a lot more why well basically the same reason as we just discussed now as for this the call we bought there's six more days for the stock to keep rallying and who knows how much more it can go but the call we sold only has until the end of the day to Rally any further so its price is going to be a lot less because it only has the remaining whatever six six and a half hourss of the market before it flat out expires so the increase in its value is going to be a lot more mild than the increase of the one expiring a week later naturally and so if we exit at this point as you can see from the calculation because the long call appreciated more than the short call did the entire spread is worth more having increased to 176 in value which means that we've made $19 on the trade which constitutes in this case a 12.
1% profit against the initial cost of the spread now if we move to the end of that same day and simply repeat the process with the stock trading at 23511 we again sell the call expiring the next day on November 14th nearest to the current price which is the 235 call for a124 and we buy the same strike price 235 call expiring a week later on November 21st for 292 Reon resulting in a total cost to us for the spread of $168 and just 5 minutes into the market the next day the short call had lost 30 cents in value while the long call only lost 19 cents in value such that if we closed the trade five minutes into the market the next day the calendar spread would have been worth $11 more than it was at the close of the previous day which on a cost of $168 is a return of 6. 5% and so if we look at the results of just these three trades and these are just three trades in just these three days we were able to produce a return of 26. 4% against the capital we had at risk before we wrap up this video on overnight calendar trades using a very small amount of capital for each trade I wanted to make a few really important points first off this trade will absolutely experience losses as well and so you have to place a stop on this trade just as you must do with any style of trading and you'll notice that we selected a very low profit Target on this trade just 5% and we did that because so many times this trade can be closed very early the next day if the Market opens with a mild move to the Upp or downside and so it's always a good thing to get in and out of the market quickly with a solid profit on any trade however that also means that since we have a modest Target you should also set a very mod stop so that your target profit and stop are reasonably close to each other otherwise the trade will not work out in the long term economically to determine the right stop for a trade like this we recommend that you acquire a reliable options back testing software and test various levels of Target profits and maximum losses until you find the right combination to produce a solid return on this trade over the long term Now iwm options are extremely liquid and therefore you can easily scale this trade up with much more than a one lot if you so desire for those of you feeling like the dollar amounts we discussed in today's video are far less than you're looking to make per successful trade obviously the larger number of lots you trade the more money you'll make on winning trades and the more money of course you're going to lose on losing trades but of course the returns will remain the same against the risk you're taking regardless we recommend very very strongly that any new trade strategy that you adopt should be traded on a minuscule amount of capital initially until you get used to the trades nature and so that you can clearly understand the risks and rewards of the trade before ever dreaming of trading with substantial Capital trust me on that and so what I'd like you to take away from today's video is that there absolutely are option strategies that require extremely modest levels of capital you don't need to be a billionaire or even a millionaire to trade option strategies you can carefully and intelligently grow your trading account using as little as a couple of hundred bucks per trade just like we demonstrated to you in today's video about iwm call calendar spreads and the nice thing about using overnight trading strategies like this one is that it's quite possible to hit your target at or near the open the next morning professional options Traders are well aware of the quick profit potential and herent in overnight options trading strategies and we're well aware of and respect the risks of those trades as should you as an independent retail Trader now if you'd like to learn three more option strategies that our prot Traders use including the unique options trick that allows you to make money while you wait to buy stocks or ETFs at the price you want and the options income strategy that allows you to make consistent money whether the market goes up or down or sideways and how to make money on a stock or index trade even if you're wrong on the direction then click the link that's appearing right now at the top right hand corner of your screen that will open up the free Workshop registration page in a new window so don't worry you won't lose this video or you can register directly for free at options.
