How To Trade Options with $1000 (Debit Spread Tutorial)

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#Options #Investing
Learn how to trade the debit spread option strategy with small accounts. I've used this option trading strategy to gain over 500% returns.

How can I invest or trade where I risk $1 to make $5? This risk/reward way of thinking will allow you to take very little risk for very high rewards. If I risk $1 and lose it, then I have another 4 times to risk $1 to make that $5. So let’s take this concept and apply them to options since the derivative market is a leveraged market and therefore it would be our best chance of making this type of profit. Ok so now let’s talk about buying options. When you buy an option you are paying a premium to buy the option contract and hope that as the stock moves in your favor the option contract becomes more valuable and you can sell that contract further as a profit. Now here is the problem - a lot of the times that contract will cost a lot of money in relation to a small account.

the debit spread will consist of 2 trades put together. You are buying an option, and then at the same time you are selling option at a further out strike price. The idea is that the credit that you take in from that second trade of selling the option will lower your cost of the contract that you will buy. So remember, when selling options you are collecting a premium - when buying options you are paying a premium. So in this case, I want to buy an option but oh this is costing me quite a big percentage of my portfolio - let me sell an option that’s further out and collect some premium to reduce this cost. Now debit spreads can be broken up into 2 categories - Call debit spreads and Put debit spreads. If you think the underlying stock that you are trading will go up you’ll want to use a Call debit spread, and if you think the stock will go down you will want to use a Put debit spread. The word debit means you are debiting your account to put on this trade - debit means paying out - so you are net paying a premium. Remember, when collecting a premium that is a credit - so don’t confuse this with credit spreads which would be the opposite of a debit spread.(Full Breakdown In Video)

So let’s put together everything into a plan of attack so you can at best put the chance of profit in your favor as much as possible. The fist thing you have to do to make this a winning strategy is to NOT OVERTRADE. This is a risky strategy and although we are tipping the risk/reward in a favorable manner you should not use this as an excuse to trade more than a small percentage of your portfolio. The idea of this is not to go all-in and try to 3x or 5x your entire portfolio - you want to be able to take a small amount - maybe its 5% of your portfolio, and use that to make a calculated asymmetric bet. If you 3x that 5% then this means you have made a profit of 15% for your overall portfolio. This is very good. If you lose that 5% then well you only lost 5%. If you feel 5% is still too risky then great, scale it back to a lower amount. Maybe for you 2% might work better. If you have a small account of $1,000 maybe you want to go more aggressive - maybe its 10%. Number 2 on the checklist would be to risk what you are willing to lose in terms of time.Last step is to let winners ride. See full example in video.

I am not a financial advisor - none of the above video is meant to be taken as investment advice. I am just showcasing MY own strategy and my investments should not be tried and duplicated based solely off the information in this video for risk of losing money. I am not affiliated or endorsed by Robinhood. Company sucks and you should use another app :)