Small Trades: Formula for a Bite-Size Trading Strategy

Trading success doesn't mean "going for broke," or searching for the next big thing. It's more like pacing yourself at the hippest restaurant in town.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Small bites: Options trade management strategy
7 min read

Key Takeaways

  • Consider “high-probability” options strategies in liquid products
  • Making smaller but perhaps more frequent trades might make your overall risk less concentrated
  • Remember that more trades means higher transaction costs

What does grilled chicken breast with red onions and spinach in a feta-cheese béchamel have to do with an options spread? When you dine fancy, you pick a place with great food. You choose the best stuff on the menu and most importantly, you pace yourself in honor of all the treats to come.

Investing is also about digestion. And pacing. Have you ever spent days—weeks, even—researching a stock? Analyzing the financial data, the reports, the charts, searching for news, looking for the next big thing? Maybe you’re so convinced you’ve found a winner, so confident it’s a superior opportunity, that you sink a lot of dollars into it. And should the stock price rise, great. But what if it goes south?

So, maybe you can pick winning stocks consistently. Most people can’t. Part of the reason is that efficient markets incorporate any new data into a stock price nearly instantaneously. The other reason is that most stocks are correlated with other stocks in their industry, and with larger indices. So if all stocks are dropping, your stock is probably dropping, too. With a chunk of your money now tied up, there isn’t much you can do if you spot another potential opportunity that might offset the loss of that larger investment. Just like filling up on your first course, you can invest a lot of emotion and lose too much money and time when you make one large investment. During your 5-star meal, it’s small bites and careful, slow going. And with investing, it’s trade small, trade small, trade small.

A Formula for Fine Dining

The idea here is that one big trade does not a big trader make. “Big” isn’t necessarily about whether a trader has a large account or a small account, but rather, “do the trading strategies work?” It could be $500 a month or $50,000 a year. But if trying to make a big chunk of profit in one big trade isn’t smart, what is?

One potential path is placing a lot of small trades in liquid products that have a better than 50/50 chance of making money, and using a trading strategy that doesn’t require days or weeks of analysis. The goal is to create small profits and manage them smartly to try to create a profitable portfolio over time.

Find liquidity

Using our food analogy, let’s start by finding the trading equivalent of a great restaurant. That would be a list of actively traded stocks and options, hopefully with narrow bid/ask spreads. With liquidity, you’re more likely to execute limit orders at a price that keeps slippage at a minimum. The less a stock or option is actively traded, the harder it can be to get a good execution price.

Where to find such opportunities? Try looking at the Penny Increment Options list on the MarketWatch tab on the TD Ameritrade thinkorswim® platform. (See figure 1.)

Not every stock and index on the list has options with tight bid/ask spreads. But looking at options whose prices trade in 0.01 increments is a good place to start. Doing this gives you an idea of some of the range of stocks whose options you might consider trading.

Penny increment options
FIGURE 1: To get a list of stocks with penny-increment options on thinkorswim, go to the MarketWatch tab > Quotes > Penny Increment Options, and look in the submenu under Public F-R. For illustrative purposes only.
Use high-probability strategies

Now, on to the expensive menu. Just like you can scan a great menu and find just the dishes you love, you want to quickly identify strategies that have a higher probability of making money. Whether your outlook on a stock is bullish, bearish, or neutral, there’s usually a strategy that might be a more appealing trade than just buying or shorting the stock. Options strategies like short puts, covered calls, short verticals, and iron condors may have a greater than 50% probability of success.

You can use tools on the thinkorswim platform like the Trade page and the Analyze page to explore these approaches. The probabilities of an option expiring in the money or out of the money are calculated in real time on the Trade page, while the Analyze page lets you calculate the probability that a simple or complex strategy may be profitable at some future point. 

Look to expire out-of-the-money

Here’s a fast way to see the probability that an option may wind up out-of-the-money (OTM) at expiration.

1. Under the Trade tab on the thinkorswim platform, type in a stock symbol, hit Enter, and look for the option quotes.

2. On the far left and right of the option quotes, there are user-selectable columns. You might see “Last X” or “Net Change” as column headings by default. If you click on the column heading, you’ll open up a menu of data available for the columns.

3. Click on Option Theoreticals & Greeks, then click on Probability OTM. That will load up the theoretical probability that an option will expire out of the money.

Take a look at figure 2. If, for example, you want to find an option that has a 70% probability of expiring worthless by a particular expiration, open up the quotes in that expiration and find the option whose “Probability OTM” is close to 70%. When trading spreads with positive time decay, selling this strike may create a 70% probability of a potential profit. Just remember that this is a probability and not a guarantee of a result.

Option chain in thinkorswim
FIGURE 2: OPTION CHAIN IN THINKORSWIM showing the probability of the calls expiring out of the money ("Prob OTM" column). For illustrative purposes only.
Keep it small

Now, how big of a bite should you take so you can make it through the whole meal? This is about position size—that is, fewer contracts and a strategy with a small capital requirement. When you engage a large number of small-sized trades, each with a probability of profit greater than 50%, over time your portfolio could have a probability of profit that is very close to that of individual trades. No matter how high a single trade’s probability of profit, it could still be a loser. And you don’t want one trade to take you down.

Now that’s not to say you can’t get wiped out with a series of smaller trades as you could with a few larger trades, but smaller potential losses on many trades can keep you at the dinner table longer. Instead of doing 10 contracts each on five trades, for example, you might try two contracts each on 25 trades. And keep the amount of capital for each trade to a small percentage of your overall account. (Just keep in mind that that many small trades will eat up funds via commissions and fees as well.)

Manage winners

Just like enjoying every bite of a nice dinner, manage your winning trades strategically. Consider taking smaller, more frequent profits when they present themselves, rather than waiting for bigger profits that might never come. A very broad target may be taking 50% of the max possible profit if and when it’s available. Of course, you have to factor in the additional transaction costs. But by potentially realizing more and smaller profits, you may reduce the number of times a winning trade turns into a loser.

Don't be afraid to lose

Finally, if you want to have a fantastic meal, you can’t be afraid to try something new and run the risk you might not like it. The same is true for trading. You can’t be afraid of losses. Every trader has them. Don’t feel bad if a logical trade loses money; it’s part of the experience. If you keep your position size small, two things happen with losing trades. First, the loss is smaller than with a larger trade. Second, you may decide to hold a smaller losing trade longer to see if the stock eventually turns into a winner. Bon appétit!

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Key Takeaways

  • Consider “high-probability” options strategies in liquid products
  • Making smaller but perhaps more frequent trades might make your overall risk less concentrated
  • Remember that more trades means higher transaction costs
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Probability analysis results are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring. Be aware that assignment on short option strategies discussed in this article could lead to unwanted long or short positions on the underlying security.

Transaction costs for trades placed online are $6.95 for stock orders, $6.95 for option orders plus a $0.75 fee per contract. Options exercise and assignment fees are $19.99. 

Security symbols displayed for informational purposes only. This is not a recommendation to trade any specific security.



Market volatility, volume, and system availability may delay account access and trade executions.

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Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

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