Traders with tastybite-size accounts are concerned with the same things with which tastylivers with larger accounts are concerned such as opportunities to sell premium in high Implied Volatility Rank (IVR) situations. Additionally, they also must place much greater concern to the margin cost of a trade which we generally refer to as Buying Power Reduction (BPR). Someone with a tastybite-sized account can always trade small but trading often, which will increase your number of occurrences, requires some special consideration. We have three ideas on how to get more bang for your buck to address these concerns. What are these ideas?
We love delta neutral strategies such as a short Straddle. The problem here is that it is an expensive position to place. By purchasing the 10 Delta Call and 10 Delta Put we can turn the short Straddle into an Iron Fly. The short at-the-money (ATM) Straddle in QQQ would have a BPR of $2300 while the Iron Fly we offered as an alternative has a BPR hit of just $585. A table compared the performance of the two strategies and they were comparable.
The second strategy to reduce buying power is to use Synthetics to replace a Covered Call with a short Put or a Poor Man's Covered Call. When the same strike is used, they become identical positions but only use around half the BPR.
The third strategy is to choose trades with higher Implied Volatility (IV). A table displayed the IV, BPR hit and Return on Capital (ROC) for XLU, UAL and GDX. Even though the share price is lower if the IV is high enough the ATM Put price can be higher and the ROC will always be higher.
For more information on Buying Power Reduction (BPR) see:
Market Measures from March 20, 2016: "Buying Power Expansion In Extreme Markets"
Options Jive from May 4, 2016: "Moves Affect Our Buying Power"
Options Jive from July 20, 2016: "Buying Power Reduction - Risk Metric"
Watch this segment of tasty BITES with Tom Sosnoff and Tony Battista for the important takeaways and the three methods of lessening the Buying Power Reduction hit, which is of special significance to those with a tastybite-sized account.
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