This question was at the top of the list when I asked for subjects to present about. This is very important question. Before we discuss the vehicles to use, why are we poised with this question? Hopefully the majority of you have money saved. Whether it be in 401k's, IRA's, Savings, etc. You need to have money saved. If you start now by maxing out 401k's (especially if the employer will match!!! FREE MONEY!!!), put 10% of monthly income into a savings account or Individual Retirement Account, then you will be way out in front of the herd.

Let's talk about identifying your objectives. If you have the picture in your mind that taking an account size of next to nothing and turning it into a business is a nearly impossible task. I am not here to tell you what you are and are not capable of...but it will be tougher than it looks. With a small account it is hard to allocate, position size, and follow risk management guidelines. Speaking of risk, how much are you willing to risk? Is this money you can afford to lose?

I am reluctant to tell you to trade options in a small account, since this will double the odds of blowing up the account. Nor will I cop out like others and tell you that ETF's are up your alley. ETF's are the worst place you can trade a small account. I would have blown up an account in weeks trading ETF's in this market. Who can weather that volatility???

Depending on how small the account is, I would consider trading covered calls on growth stocks. If you have decent growing companies, they ought to provide strong returns on a stock position while selling calls will help the bottom line by producing income. Keep in mind that this strategy would be for the risk-intolerant.

If you don't mind aiming for the stars and are more aggressive and willing to accept the risk of loss, than trade options. You need to focus on a strong R/R and high probability trades. You also need to stay away from markets you don't feel are easy to read. I started with a relatively small account trading options aggressively and was able to blossom nicely trading options on trending stocks and stocks breaking into new highs. My more aggressive approach formed as my capital backed my confidence to take more risks. I didn't start trading as aggressively as I do now, I just molded into this form.

Another avenue is to try trading funds until you can build up enough to be dangerous. Such as bond funds, or capital preservation funds during weak economic periods like we see now. Find a fundamentally weighted index to trade. Those are the ones that typically outperform the market anyhow. For very small investments, I ran into a question the other day about CD's. My neighbor "The Banker" tells me you'll only get about $50 on your $1000. BUT if you can get that in 6 months, in 12 months thats 10% per year. NO RISK. From 8/20/04 to 3/31/06 the return from the S&P is +14.8% - looking at it that way, 10% over 1 year is OK. You can NOT base information like this in dollars - just percentages. Its easy to loose sight of things with the mind set - "its only $50".Go around to the full service banks in your area and ask for the sheet that gives thier CD rates and compare them to each other. I think the national average is only around 4% right now, but sometimes they have specials. This'll allow your money to be 'close' to you in the event there is an emergency.

There are a few ideas. There is not a general response to this question since "small account" is defined differently by different folks. Everyone also has a different tolerance for risk. Take a good look at your financial goals and risk profile before you start trading aggressive options. It might not be the answer for you!

Posted by Option Addict on 8/22/2006 at 9:13 AM | Permalink