Any beginner faces this common dilemma: They would like to venture into the world of options trading but feel limited due to their small capital. Traditionally, most trading strategies involve substantial amounts of funds, and most beginners think that an account as small as Rs10,000 is not sufficient to take any participation in the options market. It is frustrating and gives a message that one is deprived of opportunities that the options market can bring.
But, fortunately, the online trading platforms have opened doors for traders with a modest capital. Platforms like Zerodha and Upstox also have user-friendly interfaces that help people trade in options, even with limited funds. Such platforms provide a number of tools and study material that makes it easier for beginners to learn the trading game without investing in heavy capital back.
It’s good news that an options account size of Rs10,000 can help in trading and earning some quite pretty amounts with the adoption of specific strategies developed for smaller capital. In this article, I’ll help you to start with a very simple approach by using the Iron Butterfly strategy, which really aids one in managing risk while aiming at consistent profits. So let’s break them up.
What Is Options Trading?
A basic understanding of options trading has to be acquired before moving on to strategies. Options are a financial derivative that gives the buyer of the options the right, but not the obligation, to buy or sell the underlying asset at a certain price within a specified period.
Options come in two kinds of contracts: call options and put options.
- Call options are the type of options that allow you to buy a particular asset at a specified price.
- Put options give the right to sell an asset at a specified price.
The Iron Butterfly Strategy
Iron Butterfly is very effective for any trader who has a small account size because it involves selling both call and put options, thus putting a risk-reward balance. Here is how you can enter this trade on a Rs10,000 account.
Step 1: Enter Your Position
You would begin by selecting an index which has a low entry cost, such as the Nifty 50, on any trading day. From the options chain you would then extract the strike closest to the current price of the index—this is your “at-the-money” or ATM strike.
When the Nifty is at 17,500, you would sell the 17,500 call and the 17,500 put. This kind of trade is known as a short ATM straddle.
Premium Earned: You collect premiums by selling the options. Assume that you receive Rs500 on the call and Rs450 on the put. So, so far, you have an amount of premium aggregated to Rs950.
Step 2: Hedging Your Position
Now, to create an Iron Butterfly, you must buy a long call and a long put at strike prices that are further away from the ATM strike, hence making your wings. For instance, you purchase a call at Rs17,550 and a put at Rs17,450.
Cost of Long Options: Assume you pay Rs200 for the long call and Rs250 for the long put.
What the net cash flow will be from the trade is calculated as follows:
- Total Premium Received: Rs950 (from short options)
- Total Premium Paid: Rs450 (on long options)
- Net Cash Flow: Rs950 – Rs450 = Rs500
Step 3: Capital Requirement
To find an idea of how much capital you require for this trade, first find the distance between your short and long options. Here, the distance is 50 points (17,500 to 17,550 or 17,450). As options in India generally tend to settle at Rs100 per point, your capital requirement will be as under:
Calculation for Capital Requirement: 50 points × Rs100 = Rs5,000
You would further subtract the net premium received, which is Rs500, to arrive at a net capital requirement of:
Net Capital Required: Rs5,000 – Rs500 = Rs4,500
This amount is certainly well within your limit of Rs10,000 in the account.
Trading Management
Once you have setup your trade, keep a close eye on it. The beauty of the Iron Butterfly is that you will have a positive payback from the time decay of the strategy; this is to say that the premium paid to buy the options is eroded as the options expire and you can close out the position with a profit.
Step 4: Exit Strategy
You should therefore have a plan for when to close your trade. A good rule of thumb is to target a 10% profit on the required capital. Here, using our previous example with a capital requirement of Rs4,500, you should look to close your position when your profit reaches Rs450.
Another stop-loss is advised that you should get out of the trade when your loss has reached 20% of the capital which you need. This amounts to a disciplined direction of risks.
Example Scenario
Now, suppose you start this trade and after some hours, the price of the index shifts by a few rupees. You may observe that you are making profit on it, hence you can close it at some profit. For example, you close the trade with profit Rs500, and then your new balance will be as follows:
- Opening Balance: Rs10,000
- Profit from trade: Rs500
- New Balance: Rs10,500
Conclusion
Indeed, you could start options trading with a Rs10,000 account if you adopt the right strategies like an Iron Butterfly. Leverage the right platform and understand the options trading dynamics, manage your risk along with consistent profit, and remind yourself that this only comes with thorough practice of risk management and sticking to a plan with continuous learning and revision of strategies.
If you want to learn more about trading options, perhaps discuss some other options that may suit your trading goals. With persistence and a right approach, one can learn trading skills and eventually gain the confidence to keep up well in the market for the future.