How to Trade with a Pauper-Level Account

Everyone starts somewhere. I began trading penny stocks in 2009 with money I made washing dishes. Unfortunately, I traded like shit and lost most of my money, because that's what happens when you trade penny stocks in 2009 instead of buying bitcoin.

Over the years since then, I have frequently considered what I would do if I started over again at 18 with $1,000 from a summer job and birthday money. There are a few appropriate approaches depending on how much risk the trader is willing to take. This post will explore how to trade responsibly with a $1,000 account so that you don't have to risk breaking yourself on FDs.

tl;dr: The most conservative investors should use ETFs. The next highest risk tolerance should use poor man's covered calls. The long-term investor who wants a higher risk-reward factor should use LEAPS. People interested in a particular industry should buy ETF shares and LEAPS in that industry. Gamblers should use credit spreads to raise money to pay for their FDs.

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Approach 1: The Boomer

Despite what many of us try to convince ourselves, buying reliable stocks and ETFs is usually the best strategy, especially for beginners. $1,000 is not a lot of money to put into an ETF or dividend stock, but it is indeed the backbone of a reliable strategy.  Take 50% and throw it into QQQ, which is the NASDAQ 100 ETF. It almost always outperforms the S&P 500. Take the remaining 50% and buy shares of dividend aristocrats, which are companies that have paid a dividend every year for 25 years and raised their dividend every quarter during that time. You can find the complete list of 66 stocks here, or you can buy their ETF, NOBL.

The Play:
- Buy 2x shares of QQQ ($470)
- Buy 6x shares of NOBL ($420)
- Buy 1-2 shares of any dividend aristocrat ($110)

Expected 40-year return with no additional deposits: 76,752.56

Pros: This is an extremely passive form of investing; you can't accidentally screw this up; you will feel rewarded with frequent dividends; this portfolio will outperform most new traders; your expected return over 40 years with no additional deposits is over $70,000 according to moneychip's compound interest calculator (10% compounding).

Cons: This is boring and you will get bored; you will get FOMO seeing people making more money off their investments; you will need to make more deposits later to make this portfolio worthwhile.

Tips: Reinvest dividends into your shares so you receive compounding returns; make frequent deposits and purchase more shares; take some money and experiment with options for the education, but only use money you're willing to lose; consider wheeling when you make it to 100 shares.

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 Approach 2: The Theta Farmer

Traders with a decent understanding of options can use Poor Man's Covered Calls to "farm" premium to be reinvested. Truthfully, you can achieve a solid string of PMCCs with less than $1,000. But if you are the type who is looking for some sweet gains while accepting risks of volatility, there are some good opportunities in SNAP and T. SNAP is a nice, moderately-high volatility stock that offers solid returns from PMCCs. And T, being more of a blue-chip and soon-to-be dividend aristocrat, offers lower premiums but has greater stability. The two together make solid PMCC picks. Any remaining balance should go to shares.

The Play:
- Buy 1x 3/2021 T $26c ($420)
- Sell 1x weekly T $30cc for about $15
- Buy 1x 1/2021 SNAP $20c ($450)
- Sell 1x weekly SNAP $23.5c for about $45
- Buy 4x T shares ($120)

This play could bring about $60/week in income if things go according to plan. Be sure to read the post on PMCCs linked above for management strategies. 

Pros: Weekly income that can be reinvested; exciting and rewarding strategy; risk and reward are well balanced; performs well in flat markets.

Cons: Requires active management and expertise; runs risk of major losses if your stocks absolutely tank; runs risk of minor losses if stocks fly significantly higher; you will not receive dividends from your long calls.

Tips: Roll any ITM covered calls at least once and then close the position altogether if you go ITM again; reinvest all premiums into shares of SNAP and T to reduce your gamma risk (see PMCC post) in case the stocks rise significantly, but reinvest into something different after reaching about 20 shares of each to spread risk; stay patient.

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 Approach 3: The LEAPer

LEAPS are long-dated calls or puts that allow the investor to establish advanced spreads or gain leverage while taking on only slightly more risk than owning shares. For the new trader, we will explore the latter. Effectively, the delta of any call LEAPS you purchase is how many shares you are controlling. You can effectively own 70 shares of SPY using LEAPS for a fraction of the $22,750 it would cost you to buy 70 shares. You can find more information on LEAPS here. 

You can buy LEAPS on any optionable stock. But for the new investor, you'll be priced out of the big boys. Instead, choose some stocks you believe will grow (or recover) over the next several years, and use LEAPS to effectively control shares for a low price. In light of the 5G upgrade and the eventually recovering tourism industry, I favor NOK, NCLH, and AWAY. AWAY is an ETF that captures tech companies behind the tourism industry.

The Play:
- Buy 2x 1/2022 NOK $4c ($280)
- Buy 1x 1/2022 NCLH $15c ($600)
- Buy 6x shares of AWAY because options are not available yet ($120)

This play will pay out handsomely as the share prices of these beaten-down stocks recover. Plus, you'll always have the option to purchase these shares at a great price if you decide you want to hold the underlying later.

Pros: You will own a disproportionately high delta for the amount of money you are investing; you have lots of time for the stock to appreciate so near-term drops don't matter; you can convert to PMCCs to pull premium when stocks spike but you expect a step back down.

Cons: If the stocks don't appreciate, your LEAPS will lose value; you will not receive any dividend; your money stays tied-up for a long time and cannot be used on other plays.

Tips: If the underlying stock rises but you expect a regression, sell a covered call to convert to a PMCC to capture premium for reinvestment; reevaluate your holdings after a continuous rise to determine if you should continue holding or if you've hit your profit target.

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 Approach 4: The Pothead

Weed stocks were all the rage in 2018, but they've taken a real hit since then. Weed is becoming legal across many states, so the Green Rush may still be low-key intact. However, there is no way to choose a winner among the hundreds of companies all trying to grow dank kush. Fortunately, there is an ETF that captures all the major weed players: Alternative Harvest, MJ. Also keep in mind that this approach is suitable for other industries too, as most have their own ETF such as JETS for air travel.

The Play:
- Buy 1x 1/2022 MJ $13c ($300)
- Buy 54 shares of MJ ($700)

The 54 shares will more than accommodate the 0.58 delta on the MJ LEAPS. This play effectively gives you the same exposure as having 112 shares of MJ, but for $1,000 instead of the $1,450 it would cost to buy the shares outright. Plus, as MJ rises, your LEAPS' delta will rise, resulting in you effectively owning the same exposure as a higher number of shares.

Pros: You get exposure to all weed players so you don't have to guess at which one will emerge as the strongest; your shares will not expire and you have 17 months on the LEAPS; you can convert to a PMCC whenever you need; you can buy MJ at $13 whenever you want in case it rises very high.

Cons: You are putting your whole portfolio into start-up weed stocks; no dividend in the foreseeable future; there is a major risk that the federal government will crack-down on weed companies and shut them down; everyone will think you are investing for weed and not for money.

Tips: Use PMCCs to take advantage of any share price spikes that you don't expect to last; diversify into other sectors with future deposits to ensure you are not overexposed to weed stocks (you have enough exposure as it is).

Approach 5: The Montague 

Young investors are not inherently wrong if they choose a riskier way of investing. After all, 18 year-olds have a lot of life ahead of them, and making a decent amount of money off the bat can trim several years off one's working life before retirement. Besides, teenagers have few actual expenses, so losing money wouldn't be the worst thing in the world.

If someone wants to roll the dice, there are some opportunities to control risk while still making some real loot. These involve using credit spreads to generate money to be used for FDs. This relieves the trader of having to use "his own" money for risky trades. Medium volatility stocks like SNAP are great for this strategy.

The Play (keep in mind this can change with the trends):
- Sell 1x SNAP $21p for $90
- Buy 1x SNAP $20p ($55)
- Buy 1x SNAP $24.5c ($45)

Admittedly, this method is not my favorite because it involves buying FDs. However, this does allow the trader to take on FDs without having to dig into his initial collateral. As long as SNAP does not decrease below $21 from its current price of $22.40, the trader did not lose any money even if the $24.5c expires worthless.

Pros: The trader will proft if SNAP rises anywhere above $24.50 and does not need to worry about the $45 premium raising the breakeven since the put credit spread already provided this capital; the trader does not lose money if the stock stays flat despite buying an FD; the strategy is exciting and can result in huge gains if the stock rises dramatically.

Cons: The trader spends all of his credit from the put credit spread to buy an FD, so losses will start incurring immediately if SNAP drops below $21; the probability of profit is low because the stock needs to rise 4% before profits incur; the trader may get frustrated seeing the stock end up between the short put and long call, negating any gain he could have had from the put credit spread.

Tips: Be prepared to see gains from PCSs and losses from FDs balance out, which will be frustrating; reinvest any gains into shares instead of more montague rolls to ensure you don't burn all your past gains on one bad play.

Final Thoughts

There are few "wrong" ways to invest with a $1,000 account, and all of them involve overextending your risk on short-term or low-probability trades. Focus on generally conservative strategies, make regular deposits, and take any loss as a learning experience. The small-account investor should use debit strategies with distant expirations, purchase shares, and only sell covered options. If in doubt, buy QQQ.

Also, do not expect that $1,000 will be enough for you to make a lot of money unless you are a lucky gambler. Continuously pay yourself first by investing your paychecks within your risk tolerance to build a larger portfolio.

Disclaimer

The positions posted above are illustrations only. Do not blindly follow the plays posted above or you are liable to lose money. Perform your own analysis before making any trades and only trade the plays above if you agree with them with complete understanding of risks. When in doubt, consult a financial advisor. Or buy QQQ.