If you have a small account, this is the single most efficient way to grow it, trading options. Hi, I'm Mike Bolafuri, co-founder of SM Capital. We're one of the top proprietary trading firms in the world, and we've developed numerous seven and even eight figure a year traders from scratch.
The strategy we're about to show you is a cornerstone of how professional traders build capital. You found the right place to learn, so let's get to work. Hi, I'm Seth Freudber and I'm the head trader of SMB Capitalist Options Trading Desk here in Manhattan and we're in touch with aspiring traders from all over the world and they're interested in trading our capital, but they're just getting started and they don't have a great deal of capital in their accounts and they've heard that options income trading requires a large amount of capital.
And so even though they want to build up a track record of successful trades and then submit their records to us to get us interested in funding them, they don't think that's going to be possible. But the truth is that there are tons of options income trades that require very little capital. And that's what today's video is about.
We're going to be teaching you three easy to learn strategies that require well under $3,000 in capital to trade. So, if that sounds like something you'd want to hear more about, then stick around. You're going to be surprised how little money you need to put up to trade really viable option strategies.
Now, before we get into the option strategies that we're going to 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've put together a video for you to understand the absolute basics of options. And if you click the video appearing on your screen right now, it will lay out the groundwork for you to understand the strategies we're going to be sharing with you in this video. Then when you're finished, you can come back and watch the rest of this video.
So, as you might know, there are investors who like to buy shares of stock and then sell call options every month or two against those shares of stock and create cash flow for themselves that way. For example, let's head back to April 4th of this year when the market was selling off around tariffs and oil stocks like PSX Philips 66 stock were selling off as well. And as you can see that day, the stock had dropped from trading around the 130 range very quickly down to 98.
81 and additionally its RSI reading was at an extremely low 21 which normally would be interpreted as a stock being very seriously oversold. So, if you wanted to enter a covered call trade near the close that day, you could have bought a 100 shares of PSX at its closing price of 98. 881 and simultaneously sold a call expiring a few months later on June 20th.
As you can see from the historical prices at the close that day, you'd be paying 98. 81 for the shares and selling the call for 210, creating a PSX covered call trade. However, that would have cost you 9671 as you can see from the calculation because the shares would have cost 98.
881. But because you're selling the call, you receive that $210 you get from selling the 120 call for a 210 price, which translates into $210 of positive cash flow because options represent rights related to 100 shares of stock. So, you always multiply the options price times 100 to get the actual cash flow of the option.
Well, now that's a problem, right? If you only have a $3,000 capital account, obviously, but we have a solution for you, and that is a strategy known as the diagonal. And it works like this.
Suppose that on that day instead of buying the covered call position, he sold that same 120 call, but this time instead of buying 100 shares of PSX, he buys the 80 call, which is known as a deep in the money call because it's located nearly 20 points below where the stock is trading at a price of 2470. And as you can see, this combination only costs him $2,260, which is less than 25% of the cost of the covered call position. But here's the surprising part.
You see, a covered call trade or a diagonal trade are considered completed when the option you sell, the June 20th 120 call expires. And so, let's compare the outcome of the covered call against the outcome of the diagonal. You see, by June 20th, PSX had bounced and the stock closed that day at 12478.
And so, what would have happened with the covered call position? Well, the call was at the 120 strike. And so, since the stock closed at 12478, the 120 call value increased to 470, which logically is almost exactly the difference between the call's strike price of 120 and the closing price that day.
But that's actually irrelevant to us for the covered call. Why? Because the shares are going to get called away and that call option just disappears and doesn't exist anymore.
The shares are going to get called away because the stock closed above its strike price. And so the trader is required to sell his shares to the one he sold the call to for $120 per share. And so the outcome of the trade is simply the cash he gets for selling the shares at 120.
In other words, $12,000, which he's required to do, less the original cost of the position, which as we shared with you earlier was 9671. Which means that the profit on that original investment was 24% in a few months, which is not at all shabby. But if you never had the capital for that trade, then you would have been left out of that win.
Let's take a look at the results of the trade. You could have afforded the diagonal. You see, with the diagonal, you don't own the shares, and so you can't sell them.
Meaning that you're going to need to buy that short call back. And the best time to do that is right before it expires. So to close the trade, let's start with buying back the call, which as we showed you earlier had rallied to a price of 470.
But we also sell off the long call expiring in March of 2026, which had rallied up to a price of 46. 45. And that's because the call started out so far below where the stock was trading in the first place that the call behaves very similarly to owning 100 shares of the stock.
Not quite, but almost. And while that can be the subject of a video for another day, just for now, please accept that deep in the money calls act as a pretty good substitute for owning 100 shares of stock. And if the stock appreciates a lot, that deep in the money call is going going to appreciate a lot as well, almost as much as the shares would increase.
And if we look at the outcome of the diagonal trade after cashing in the greatly appreciated March 80 call and buying back the 120 June call because we don't own the shares and of course subtracting out the original cost of the diagonal itself, we end up with a profit of $1,915. Now that's obviously less than the 2329 that we would have made with the covered call, but that was on more than four times the capital which we don't have. we only have 3,000 and so we just would not have been eligible to make that trade.
Whereas with the diagonal, we got into a trade that had very close to the same outcome on less than a quarter of the capital. And think about the return on that capital. The covered call return was 24% whereas the diagonal return was 84%.
A very very efficient use of capital which is one of the great features of trading options. Okay. So now you can see how we can create what options traders refer to as a synthetic covered call using the diagonal trade.
So we can move on to our next example of trades that can be made for less than $3,000. And that is known as the put credit spread. Now to illustrate this trade, let's jump right into a tangible recent example to drive home that how this works.
So, let's head back to January 13th of this year and pull up a chart of Altria, which as you probably know, trades under the ticker symbol M O. And as you can see, since August, MO has held that 50 level. And on the 13th of January of this year, it had returned to that level.
And so, you might have gotten bullish on the stock at this point given that it had held that level several times in the last five or six months. So, you might have thought about buying 100 shares of MO, which obviously cost you $5,085 if you had the money. But what if instead on that same day you pull up an options chain expiring about five months later on June 20th and instead of buying the shares, you instead went to the put side of the options chain and found the put option with a strike price just below the closing price of 5085.
In other words, the 50 put and you sold 15 of those for that price of 254. And then you went to the next strike down, the 47. 5 put and you bought 15 of those for price of $162.
Well, when you do that, selling a put option higher up on an options chain and buying a put lower on that same options chain, when you do that, you're executing what options traders refer to as a put credit spread. When you execute a put credit spread, just as the name implies, you're going to receive a credit cash in your account. And in this case, as you can see, selling the 15 puts at the 50 strike price for 254 and buying the 15 puts lower down at 47.
5, that combination nets down to $1,380 of positive cash flow. as you could see from the calculation where again each options multiplied by 100 because they represent rights related to 100 shares of stock and you bought 15 of them in both cases. So those are the calculations that result in your positive cash flow of 1380.
But, and here's the beauty of using this technique, and that is that your broker is only going to require you to have $2,370 in your account to execute this trade. Why? Well, it has to do with the calculation that the broker makes, which we've actually displayed on this slide.
But don't worry about it. It may look complicated to you. It actually isn't.
But the broker is just taking the worst case scenario loss of the trade and subtracting out the premium you got for selling the put credit spread in the first place. We can go over how that's calculated in another video. So don't worry about that.
But just accept for now that your broker is going to require $2,370 for you to put this trade on. Okay. So now let's move to the day this trade expires on June 20th.
And as you can see, the stock did in fact bottom out in that 50 range and then began to bounce throughout the first of the year, closing at 5975 on the day the trade expired. And so if we had simply bought 100 shares that day, as we mentioned before, our profit would have been $8. 90.
Certainly a respectable profit of 17. 5% in less than 6 months. But it pales in comparison to the put credit spread which made much more money 1380 yet required less than half the capital with a return that was more than three times greater than buying the shares a return of 58%.
And so you can actually make more with a significantly less amount of capital once you understand how to put together options strategies. The third capital efficient option strategy that we're going to be teaching you today is known as the calendar spread. And while the calendar spread is a super simple trade, it's actually quite powerful and also happens to be one of the most capital efficient options trades out there.
So to illustrate how a calendar spread works, let's head back to April 30, 2025, which is the day after UPS, the Global Package Delivery Service, last reported its earnings. And as you can see that day UPS had closed at 9530. Now suppose that you were of the opinion for whatever reason that you formed the opinion.
Maybe you've observed for example that UPS is a stock that tends to move substantially after earnings are announced. In between earnings, you feel that the stock is unlikely to do anything but just chop around near its current price and not move much at all until the next earnings release, which will supply the market with fresh news about the company's stock. So, what whatever your reasons are, if that's your viewpoint, then a calendar spread is the perfect trade because it does best under those circumstances.
In other words, the strategy makes the most money when the stock isn't moving at all. So, let's say that on that day, April 30th, at the end of the day, you pulled up an options chain that expired a little less than two months later on June 20th, and you went to the put side, although you can actually do this trade on the put or the call side, but we're going to go on the put side in this case. and you found the put option with a strike price as close as possible to the stock's trading price, which obviously is that 95 strike price, and you you went ahead and sold 25 of those June 20th options for a price of 445.
And then on the July 18th options chain, on that very same strike, you went ahead and bought 25 of those same 95 strike price puts, but because they expire about a month later, they are going to be priced higher. In this case, at 525. Now, a key thing to remember is that with options at the same strike price but different expirations, the later expiring one is always going to have a higher price because think about it, the protection, which is the reason people buy puts in the first place in most cases, has a longer life to it.
So, it's much more valuable than, for example, a put at the that same strike price, but let's say it expires the next day. That's going to have much less value. This phenomenon known as the options time value is the key concept actually in this trade as you're going to see.
And so this is going to cost you only coincidentally exactly $2,000 because you pay a total of 13125 to buy the 25 July puts. But then you get a huge discount for selling the June puts in the amount of 11125 leaving you with a net cost of $2,000. So, as you can see, the short options really drive down the price of a calendar spread, which is why it's such a great trade for smaller accounts.
Okay, so now let's move to the day the short option expires, which is June 20th. And as you can see, the stock did rally a bit in that two-month period, but not very much, closing at 9927 by the end of the day on June 20th. And so the way calendar spreads are handled is that on the day the short option expires, the trade is considered over and you just close it.
So let's see how this trade would have ended up had we closed it that day. So first of all, the shortput simply expires worthless, right? Because the stock closed at 9927, but the put strike price is 95.
So that has no value. No one's going to sell their shares for 95. if they could sell them for 99.
27 in the open market. So those expire with no value. But when we look at the long put option expiring in July and this is crucial to understand, you can see that option certainly has lost value because the stock went up and on top of that a few months have gone by.
And so the market is clearly going to value that put less than two months earlier when the stock was trading only a few pennies above its strike price. Today there's less than a month left on that option's life and the stock has rallied moving farther from 95. And so naturally it's going to depreciate and in fact the put closed that day only worth a$124 as you can see.
And so completing the profit calculation we add in that remaining value of the July puts which is 3100. We subtract out the original $2,000 cost and the result is a profit of $1,100, a return of 55% on this inexpensive trade. Obviously, a solid outcome.
And so the major thing to remember about put calendar spreads is that the major reason they make money is that the option that you sold, which always expires first, will always lose value faster than the option you've bought, which always by definition expires later and last. And so that relative loss of value between the short and long option can cause the short option to go to a very small value or even zero as it did in this case. While the long option that we bought will always retain some value because it's got to cover the risk of the stock selling off a lot before it expires.
Whereas the expired option obviously no longer literally exists. And so what I'd like you to take away from today's video is that options traders with modestsized accounts absolutely can trade options income strategies. You just need to understand which strategies to use.
And in today's video, we share with you three very viable option strategies that professional traders use all the time to express their trading ideas. And there's no reason that you can't build up a track record of successful trades, even if your account is more modestly sized. Now, if you'd like to learn three more option strategies that are protrad, 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.
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