Nowadays, trading options can be done with more leeway for better returns, even with minimal account size. However, to conduct a business well, what you actually need is a strategy that will suit your budget and, at the same time, optimize your potential for return.
Fortunately, starting options trading on a Rs 10,000 account is very well plausible. In this tutorial, we take you through the feasible, very effective strategy called Iron Butterfly meant for small accounts and is easy to understand for beginners. So we will see step by step how to execute it, and how to handle the risk and optimize the capital.
What is Options Trading?
But before strategies, a look into the perspective of option trading is important. Options are financial instruments that give a holder the right—not the obligation—to buy or sell the underlying asset at a predetermined price within a specified time frame. The two main types of options include calls and puts:
- Call Option: This gives the holder the right to buy the underlying asset.
- Put Option: It gives the holder the right to sell the asset on which it is written.
Options trading might sound daunting at first, but given the right approach and strategy, it can become a powerful tool in growing one’s capital.
The Iron Butterfly Strategy
Due to that fact, the Iron Butterfly is one of the favorite strategies for traders with smaller accounts because it has limited risk and good potential profit. Here is a detailed breakdown of how to execute this strategy:
Step 1: Setting the Trade
- Identify the Underlying Asset: I am going to take an example of an Index. I will consider the SPX or the S&P 500 Index. On the day of trading, test the opening price of that index.
- Choose the Options Chain: Select the zero DTE options that expire on the same day.
- Sell ATM Straddle: Sell the call and put option at the strike price closest to index opening price. Example: If SPX opens at 5295, sell the 5295 call and put.
Step 2: Buy the Protective Options
- Determine the Strike Prices: Buy a call option 20 points above the short call and a put option 20 points below the short put. For our example, this means buying the 5315 call and the 5275 put.
- Iron Butterfly Trade Execution: The trade involves selling the ATM straddle and buying the protective options. This can mostly be executed in one trade in most trading platforms.
Step 3: Monitoring and Adjustment
- Track the Trade: Monitor the index and premium of the options throughout the day. Because of time decay, the premium on the options you sold will decrease faster compared to those options you have bought.
- Close the Trade: After 30 to 90 minutes, check whether you have attained your desired profit or loss quota. You can opt for a profit threshold of 10% in this strategy or stop incurring more losses at 20% of the needed capital.
Example of a Trade with Rs 10,000
Let’s break down a hypothetical trade:
- Initial Setup: Assume SPX opens at 5295. You sell the 5295 call and put options and collect Rs13,500 in premiums. Against this, you are buying the 5315 call and the 5275 put options for Rs2150 and Rs 3200 respectively.
- Capital Requirement: Calculate the net capital required in trade. Difference between short and long options be 20 points x 100 = Rs 2,000 – Premium received Rs 13,500 Net capital requirement Rs 650.
- Monitoring: In case the SPX declines slightly in value at 10:10 a.m., you will realize some profit. As a matter of fact, if the trade closure fetches Rs 730 as profit while closing the trade it crosses the 10% profit threshold level.
- Closing the Trade: Close the trade when the profit/loss achieved by the trade equals your pre-defined thresholds. By way of example, if you close the trade at a profit of Rs730, your Rs10,000 account is now Rs10,730.
Risk Management Tips
- Start Small: Trade small initially as a way of gaining experience into various ways in which time decay and market movements are going to affect your trade.
- Stop Losses: Always use a stop-loss order to limit your potential losses.
- Regular Monitoring: Check on your trades from time to time, along with the performances of the underlying asset.
- Risk Management: Never put all your capital into one trade or asset. Diversification can be a risk management strategy.
Benefits of the Iron Butterfly Strategy
- Defined Risk: The maximum risk is capped or limited to the difference between the strike prices less premium received.
- Profit Potential: The strategy profits from only a minimal amount of price movement and time decay.
- Small Account Suitability: The Iron Butterfly is quite effective for the low-capitalized trader because through it, one is able to manage the risks effectively and capitalize on even small price movements.
Conclusion
Options trading can be initiated with as small an account size as Rs 10,000 if one knows exactly how to go about it. The Iron Butterfly offers a structured entry into the options market, well within the reach of even the smallest capital. Thus, once the basics are learned and the trades executed judiciously, along with strategies for cutting losses, incremental growth of the account will not only increase the size but also give confidence to the trader. Keep in mind that trading is a continuous learning and adapting process.
The strategies identified in this guide should be followed, together with testing different setups and keeping information about market conditions. By doing so, with practice and patience, you can safely enter into the options trading world and build a profitable trading career. For those interested in exploring more options strategies, consider enrolling in workshops or seeking additional resources to enhance your trading skills further.