Can An Inexperienced Investor With A Small Account Earn Decent Profits – Investor Questions

A question I received recently from an investor, is one I often hear about for small accounts. Chris emailed a number of questions and wonders if he can start investing with just $10,000 to $15,000 in an account. Let’s review his questions and look at some suggestions.

Investor Questions

I am interested in membership to your site and learning your investing ideas. My concerns relate primarily to my lack of experience. I have done some reading over the years but I have not entered the market yet. I am feeling like it may finally be time for me to start investing. It would be helpful to have some guidance from a knowledgeable and seasoned investor, like yourself.

My other concern is related to account size. My account would be much smaller than some of the numbers that I have seen mentioned in some of the articles on your site. I am thinking of starting with 10-15 thousand US for my account. These funds are currently in a ROTH IRA.

I am hoping you might advise me as to whether your membership would be suitable for me at this time, given my lack of experience and small account size.

Thank you for any suggestions you may have.

Chris

Suggestions and Tips:

The lack of experience is something all investors interested in trading options and stocks must overcome. Luckily today almost all discount brokerages offer paper-trading accounts. These accounts act like real accounts, keeping track of losses and gains and allowing investors to trade as if the capital were real. This is an excellent way to research and apply the different strategies I discuss on my website.

Paper-Trading Has Real Value

Not all strategies I discuss are for every investor. When starting out I recommend paper-trading basic strategies of selling put options and selling covered calls after stock is assigned. Once an investor becomes comfortable with these strategies, then the focus should shift to learn how to sell put options or covered calls profitably. Normally when I tutor one-on-one, we keep track of winning trades and losing trades. Once an investor reaches 80% or more in winning trades, I then suggest using a small amount of actual capital. If the first few trades fail, I then suggest going back to paper-trading so we can study the paper-trades that win versus the actual trades that lose.

You Must Be Approved For Trading Options

The problem Chris may have is his lack of experience, may limit his ability to trade options through his brokerage. Even trading covered calls may be refused by his brokerage. Chris should first start paper-trading with $10,000 or $15,000 of paper-capital. Once he gets a better understanding of how options work, especially selling options and the risks associated with this method, he will be better able to fill out the documentation needed at a discount broker to allow for him to trade in options.

Don’t Waste Time Arguing With A Broker

Trading options is considered risky by 99% of all brokerages both discount and full service. The knowledge that stocks, not options, are the riskier investment, is not understood by almost every analyst and broker. There is no point in arguing with a broker. Instead it is better to understand their limitations in education and move ahead with learning on your own. Once you have learned how to trade options for income and profit, you should be able to get the proper paperwork approved for trading options.

Connect Accounts – The Bottom Line Often Matters

If Chris has more investments than his $10,000 to $15,000 that he wishes to start trading with, he should connect them with his $10,000 to $15,000 account. This gives him more “clout” with a discount brokerage and the chance for better prices for trade commissions and an easier chance to get approved for options trading. The larger the account size, the more interested a brokerage firm is. It does not matter whether just a small amount of an account will be actually used for trading in options. Most brokerages just look at the bottom line figure which is basically, how much capital does the investor have. Even having secured lines of credit can assist in successfully being approved for options trading simply because more debt that is being managed, proves to the brokerage that the investor has the capability of covering losses and the knowledge of how to handle debt.

Poor Credit Rating Or Bankruptcy Can Be A Problem

If an individual has a poor credit rating or has declared bankruptcy, it is more difficult to get approved for trading options unless there is actual cash capital available in a brokerage account.

Try Upgrading To A Margin Account

If a brokerage firm will only approve an investor for “cash-secured” option selling, it is often best to take the offer and open the account. Within a few months of trading options, the investor can apply for his account to be upgraded to full margin (unless in an IRA or in Canada an RSP, RIF or TFSA). If the brokerage will not approve an upgrade, it is often best to seek an account elsewhere and then move the existing cash-secured account to a margin account “in-kind”. In kind means that all open trades, all stocks held, etc., are transferred from one brokerage firm to another without having to sell out positions and take losses or end up with unwanted tax liability. This is a subject onto itself and beyond the scope of this answer.

Always Paper-Trade First

So remember, paper-trade first before apply for an options trading account. Understand the principles and the risks before applying for a “real” account.

Guidance And Assistance

The members section is set up for investors to learn through reviewing trades and trade tables, learning the various strategies that are presented and studying articles. There is no defined course at this point (May 2016) where I could say “Step 1, Step 2, Step 3” primarily because there are many different investing strategies and many different ways to invest. It is often better to start with the index which is on every page in the members section and review the different investing strategies. This allows every investor to determine which strategies they understand best and through paper-trading, provides winning trades.

Courses And Software Coming

I am nearing completion of courseware that is designed to teach basic Put Selling and covered call selling. It should be available by the start of summer. As well I have hired software developers who are 95% completed on software designed to assist in selling options and the various strategies I use for both investing and for protection of capital at risk. It too should be released shortly for members.

One-On-One Mentoring

If more hand holding is needed I do offer one-on-one mentoring. Mentoring is in a separate section on my website and I charge by the time spent which on average is about $75 an hour which I am told is quite reasonable. It is designed around the same methods I was taught by my own mentor decades ago.

Advantage Of A One Month Membership

But before jumping into mentoring, I always suggest a one month membership to read member only articles and study strategies. This should give a clearer understanding of the methods and strategies being used. For one month I suggest reading as much as possible and following trades from start to finish in a few specific stocks that interest them. This way they can see trades that are successful and trades that fail and have to be repaired. This leaves most members with a better understanding of what my strategies are and how they function. It allows an investor to determine whether my methods or strategies work for them. With investing, comfort is everything.

Mentoring For Specific Needs

From there, investors sometimes ask for mentoring to either learn in more detail a specific strategy or to learn key aspects such as how to pick entry and exit points as well as how to study stock selection. Most investing comes from experience. This is why I suggest picking one or two strategies first, and learning the ins and outs to determine whether my style of investing matches the investor’s level of comfort and understanding of risk.

Size Of Account Or Experience Do Not Matter

So in short, I think any investor can become skilled and successful at using my methods. I do not think the size of an account or experience level restricts them. Instead normally it is the level of comfort each investor has that is usually the deciding factor. It is easy to get involved in selling options and earning profits in an up market. But when a down market appears or a stock being trading collapses, many investors have a difficult time handling the volatility.

Small Account Size

Everyone starts somewhere. It is actually easier to grow a small account than a larger one. Many investors with accounts of $5,000 or less are impressed when they double their capital in a year or two, but then they become disenchanted when the growth of their portfolio slows as it grows in size. This is why many investors step beyond their comfort level and trade in stocks that are more volatile, less predictable and have a higher risk of capital loss. These kinds of stocks have better option premiums than the stocks I normally trade. Those high option premiums draw investors in like moths to a zapper but risk of loss is high.

Tips For Small Accounts

In short, a small amount of capital need not be a deterrent. Instead, investors with smaller capital need to be a bit more selective in the stocks they trade and alter their sizing. For example, if I sold 10 put or call options and an investor had a much smaller portfolio, they may want to consider selling only one or two options.

Today’s Brokerages Are Superior For Investors

Margin also plays a large role in a small account. My account was quite small when I started investing in the 1970’s. Options were traded “over-the-counter” which basically meant they were not traded on the major exchanges. There were no discount brokers and no on-line capabilities for trading. All trading was handled by a full service broker. Commissions were ridiculously high and adjusting a position often took hours. I recall in October 1987 when the markets collapsed, I was holding some options that I wanted to roll-down and into January 1988. I called my broker, waited on hold for about 20 minutes as it was a busy day after-all, told him what I wanted to do, was told the price and by the time the trade was finally filled, the cost to close had gone from $7.00 to $12.00 because it took over an hour and a half to get fills done.

That is no longer the case and today’s trading is far superior. With the introduction of weekly options, investors have even more flexibility. Small accounts are greatly assisted by available weekly options.

Tomorrow’s Trade Portfolio

I would suggest to any investor with a small portfolio to consider the Tomorrow’s Trade Portfolio. In this portfolio I outline one trade each day. I discuss enter and exit strategies along with background of the stock and rescue or repair strategies that might be needed. This type of portfolio is ideal for a small account.

Roth IRA

With your capital in a Roth IRA you may find your broker is reluctant to allow you to sell options of any kind. This is why I think paper-trading is important. Once an investor has the knowledge of how selling options works and risks involved, they are better able to get approval for trading options in an IRA. In an IRA the only options that can be sold are covered calls and cash-secure puts. Many brokerages will not allow cash-secure put trading only covered calls. You may find you have to move your IRA to get approval for selling options in your retirement account.

Options Provide Income And Protection

In my opinion it is worth the work involved to set up or transfer a retirement account for option investing. For example on Friday May 20 AT&T Stock closed at $38.45. While not expensive a 17.1 times earnings you could set up a very nice trade by selling through cash secured puts, the January 2017 $36 put strike which was earning $1.50 on Friday. This obligates the investor to buy 100 shares of AT&T Stock for $36.00 which is 6.3% below where the stock closed on Friday. Selling this put strike means an investor would own shares at $36 if the stock fell lower. It also means he earned an immediate return of 4.1% between May 20 and Jan 20 2017 on his capital at $36. For 7 months then, the investor earns more than the dividend can provide for the same 7 months and if the stock falls he is not holding shares at $38.45 from Friday, but instead may end up owning shares at $36.

If the stock fell even further, the investor might decide to apply his earnings of $1.50 to the stock which reduces the cost basis to $34.50. If his view on the stock had changed, he might be able to sell covered calls at $34.00 to get exercised out of the stock with no loss.

This is a very small example but it gives some idea as to the numerous strategies available and why trading in options is not just practical but I believe controls risk to capital being invested. Stocks are among the riskiest of investments. Options help to control some of that risk.

Ask Questions

The last thing to mention is ask questions. There is a section on the private members website called Teddi’s Help With Trades. Members can post questions there and I do my best to provide some answers. This is a great spot to ask “how would I enter this trade” and “I only have $5000 to invest. How would I adjust the size”. Another good question is “should I close this trade early?”.

Start Today And Start Small

One thing my mentor told me decades ago which I think is true today is “Start Today and Start Small”. Start out with risking only a small amount of capital and learn the strategies today to grow a portfolio in the future. At any age, an investor can get started to try to grow his portfolio. By starting small he is managing risk to his capital.

Thanks for your questions Chris.

Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.