When researching shares, you’ll find that they all trade at different prices. For buy-and-hold investors, the actual price of the shares they buy is of little consequence. It’s the total amount they wish to allocate to a position that’s important. However, for the options wheel strategy, the share price makes a difference. Specifically, it affects the minimum position size.
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Deploying Options Wheel Strategy with Small Accounts
When considering the option wheel strategy, it’s important to keep in mind that each option contract sold represents a certain number of shares, and the strike price of those shares can affect the minimum position size. For example, if you decide to sell a put on shares with a strike price of 800p, you’ll need to tie up £8,000. However, this may be more capital than you’re able to allocate to an individual position.
In the US, the same issue applies, and the shares you select for the strategy will depend on the total amount of capital you have available to allocate. With that being said, whether or not the option wheel strategy works is a topic of much debate in the investment community. Some investors swear by it, while others are more skeptical. Ultimately, the effectiveness of the strategy will depend on a variety of factors, including market conditions, the specific stocks you choose, and your own risk tolerance.
The Challenge of Limited Options for Smaller Account Sizes
However, note that there are no guarantees in the markets, and there may not be shares that fit your criteria and that you can afford. The smaller your account size, the fewer shares you’ll have to pick from. Covered call type strategies are best suited to larger accounts.
Examples of Low-Priced Shares for Covered Call and Cash-Secured Put Selling Income Strategies
There are usually enough low-priced shares to pick from for covered call and cash-secured put selling income strategies. For example, at recent prices, you would need £1,540 to sell an option on 1,000 Barclays shares, £1,470 to add in BT, £4,150 if you wanted mega-miner Glencore, £770 to include Vodafone, £2,300 for Legal & General and a further £450 for Lloyds Bank.
Therefore, the total cost of this portfolio would be £10,680 to diversify across 6 stocks.
Choosing US Stocks for Smaller Options Wheel Account Size
It’s important to note that we can access the US market for more options to trade on with a wide range of prices. With each option representing only 100 shares in the US, it’s typically possible to build a position with a smaller account. However, there are no guarantees in the markets, and you may find that nothing fits your criteria or that you can afford. The smaller your account size, the fewer shares you’ll have to choose from. The options wheel strategy is best suited for larger accounts due to this market reality.
The Role of Margin in Small Accounts
Margin can play an essential role when using the options wheel strategy with a small account. A margin account allows traders to borrow funds from the broker, increasing their buying power and amplifying potential profits. This is particularly useful for small accounts as it enables them to utilise a wider range of investment opportunities.
However, remember that while margin can increase your return on investment, it also amplifies potential losses and carries additional risks. Before using margin in your trading account, ensure you are aware of the risks and maintain appropriate risk management strategies.
Read Also: Best Stocks For The Wheel Strategy