Trading options wasn’t part of most conventional intraday tactics in the past. Times, however, are changing and traders are making significant money using options today. This page highlights the advantages and drawbacks of trading on options, as well as discussing option forms, how to get setup, and top tips.
What Are Options?
A clear answer – a basic financial derivative is an option. A legal contract gives you the right to buy or sell an asset on or during a specified date (the date of exercise). When you are the seller you are obliged to comply with the terms of the contract. This will be either selling or purchasing if the customer wants to ‘exercise’ the right before the expiry date.
Day-trading options cover multiple markets. You will get stock options, options for the ETF, options for futures and more. Often called ‘vanilla options’ are such conventional choices.
What Is An Option Contract?
For options contracts, you’ll be given a range of rights. Each contract will include details of:
- Type of option (call or put option)
- Underlying security
- Strike price (the price at which you can exercise the option)
- Unit of trade (the number of shares)
- Expiration date (the last trading day for exercising your option)
Options are often listed as complex, risky investments, and many aspiring day traders are being put off by this. There are only two major kinds of choices, though.
- Put – These options for sale allow you to sell a stock at a certain price.
- Call – These buying options allow you to buy a stock at a particular price.
Apart from the two key groups, there is a long list of different markets and options. Although not all are appropriate for day trading, the list does include:
- Stock options
- Index options
- Mini options
- Mini Index options
- Options on futures
- Weekly SPY options
- OEX options
- ETF options
- S&P 500 options
- IRA accounts
- E-Mini options
- ES weekly options
- QQQ options
- Deep in-the-money (ITM) options
- Crude oil options
The Underlying Asset
You will typically note that most options are focused on shares of, for example, publicly traded firms, Twitter and Amazon. There are however a increasing range of options focused on underlying alternative investments. Those include day trading options on stock indices, currencies, commodities, and REITs.
I case you are interested in day trading stock options for a living, it is important to be aware that the contracts are focused on the underlying stock’s 100 shares. The exception to this law is when the changes arising from stock splits and mergers take place.
Many stock options exchanged are from the US. They can be exercised from the date of purchase until expiry at any point. Nevertheless, European options can only be reclaimed upon expiry date.
Options vs Futures
There are many parallels between day trading options and futures that many people soon realize. They are normally both based on the same instrument that underlies them. There are also several parallels to the structure of the real contracts.
The difference is how the trade takes place. You get a wider variety of choices with the options. You’ll also note that the laws of trade are different. Options can be sold individually, or you can buy them alongside stock trades or futures contracts to create a form of risk insurance.
Why Trade Options?
There are a variety of reasons you might make serious trading options for capital. For some enticing factors, including placing financial remuneration on the side, day trading with options appeals to traders.
- Low-cost strategy – Day options trading offers you the ability to enter and exit positions faster than other securities, such as stocks and mutual funds, and with less expense. Purchasing an option is therefore considerably cheaper than purchasing the underlying asset, the stock shares, for example. So, with much less money, you can manage the same number of shares.
- Diversity – Because options are so much cheaper than purchasing the actual stock, you can take advantage of an expanded amount of opportunities to invest. Your money will go much further, through the opportunity for income.
- Greater advantages – You can benefit even more from an option as the stock moves. Let’s say a stock moves between $25 and $50. That would carry you a share benefit of 100 percent. Yet a call option going from $1 per contract to a $5 contract would offer you a benefit of 500 percent. So with an alternative, you can earn more and in less time.
- Where some sectors struggle, options can succeed – While certain business sectors struggle, options can succeed. It is partially because you don’t have to use your option to make the most of it. Plus, it can benefit from uncertainty itself.
- Mutually beneficial – While options are often built on stocks, combine both and they can bring greater benefits to you. This is because you can sell the income-generating right on the stocks you already hold.
Trading of intraday options is multifaceted and carries tremendous potential for benefit with it. But, the best aspect is usability. From anywhere in the world you can start day trading with options. Everything you need to do is connect to Internet.
Given the many advantages that come with options trading, there are many obstacles. Fortunately you can conquer all the obstacles mentioned below.
- Big bid-ask spreads – The bid-ask spreads are also wider as compared to stocks. That is due to the reduced liquidity seen in options markets. It may fluctuate up to half a point, which can reduce a day’s trade profit.
- Reductions in price shifts – Price change may be constrained by the time value dimension of your premium options. Notwithstanding the value increasing with the price of the underlying item, the benefit will to some degree be offset by the loss of time value. Luckily, the day trading option time-value is fairly small.
Either of these disadvantages shouldn’t preclude you from finding income for day-to-day trading options. Taking into account these factors you should change your trading strategy accordingly.
How To Start Trading Options
Beginners on day trading options need a few straight steps to follow.
Open A Brokerage Account
Your broker will help make things simpler. There are numerous brokers available online today to choose from. The goal is to find one that suits your own needs. When making your choice you’ll need to weigh a range of factors.
- Costs – The fees are contrasted between various brokers. You can also notice some brokerages offering zero commission fees for trading options. Also, it is easy to test their fee structure, and there are no hidden costs. You have to ensure you get decent spreads.
- Type of account – Would you like to start day trading options in a cash account, or would you prefer a margin account? You can only sell the money you currently have with a cash account. However, a margin account will allow you to borrow money from your broker to capitalize on business. Options for calling margins will give you increased buying power. It’s worth remembering that a cash account will only let you buy an opportunity to open a position. To sell an option you’ll need a margin account without owning the underlying asset.
- Platform – That’s where you’re going to spend a lot of time. The best trading options platform will have all the charts and technological resources that you need to transact effectively. If you trade when you’re on the move, you may want to explore their smartphone and tablet apps too.
When you’re set up with a broker, and you’ve got your very own trading room ready to go, an effective plan will be required. Day-trading techniques come in all shapes and sizes, some simple and some complex. Before we look at an example, there are a few critical components that will be involved most strategies.
Charts & Patterns
When you transact using the internet, you can possibly use charts and trends to forecast future changes in prices. They are working on a simple theory – history is repeating itself – and you will find many a wealthy trader who wholeheartedly agrees with that assertion.
Your chart will need the best trading options indicators. Such vary from strategy to strategy but include:
- Put Call Ratio Indicator
- Money Flow Index
- Open Interest
- Index of Relative Strength
- Bollinger Bands
You will find that it takes hard work and practice to find pattern trading with options. You will need to smooth out any creases and try a number of different charts before you find one with numbers that paint a good picture.
Timing is important. Not only when you enter and leave the trade, but also when you are setting up for the day ahead. Strategies of options that operate usually have a trader behind them who is up bright and early.
You would want to be up as early as 06:00 a.m. ET, for example, if you want to get a sense of market leadership going around Europe and coming open to the United States. You should start configuring your trading plan based on what your market has done during the night.
Let us take the E-mini, for example – in the same direction as the E-mini would shift, up to 70 percent of stocks would, too. If you know this you will also know whether most stocks will open up or down at 9:30 am ET when the US market opens.
It is worth keeping in mind that the States also set the world market course. So, waiting an hour for the market to calm down somewhat before you launch your first trade is sensible.
Day trading on options requires close consideration and a lot of time. If you want to earn meaningful money, make sure you’re able to put in the hours.
This is one of the tactics for basic options that work. If the market is rising you are buying calls or selling puts. If the price is down you’re going to sell calls or buy puts. Most prefer selling options, rather than purchasing them. Some equities, however, move so well that buying the option could yield greater profits than selling the option and waiting for it to go downhill. One such example is Apple.
Let’s just quickly return to the E-mini. You’d be careful in the first hour and then try to see where the open-ended E-mini is trading seeing its open, and whether Apple is going in the same direction, based on its open.
If this is the case, if going higher, or if going lower, you can buy an at-the-money, or first strike out-of-the-money bid. Now you’ll sit back and wait half an hour to see if you’ve been trading in the right direction. If so, you can put a stop half the value of the option you’ve bought. And if you priced it at $10.00, you’d set it at $5.00 for the stop.
And get out if the market turns. There are plenty of possibilities out there. If the trade looks good though, then you’d wait a couple of hours and re-evaluate at 2:00 pm ET. If the market moves in your direction you could stick with it and place your stop at around 8-12 cents on the other side of the open.
If it continues to look good you can re-evaluate until the market closes at about 3:30 pm ET. Then you can make your final decision, and hopefully count your income.
Tips For Trading Options
With clever day-trading options strategies, useful tips can still be used. From risk management and stock options tips to tax education and laws, you’ll find top tips below that could hold you firmly in the black.
Some of the top tips is to gett interested in the educational opportunities around you. Data is continuously digested by the best traders. You don’t want to be left behind because the competition is shifting. The PDF with day trading options by Jeff Augen are available for free download and considered one of the most valuable tools out there. You should also remember the following though:
- Books & Ebooks
- Chat rooms
- Video tutorials
- PDFs (e.g. Tom Demark day trading options pdf)
The temptation to throw your hat into the ring early on can be hard to resist. Yet getting to grips with stock options strategies first with a trial account is always a smart decision. Not only can you work out any flaws in your trading strategy, but before you buy, you can check out your broker’s platform.
We are funded with virtual money and you don’t have to worry about losing the hard-earned cash. Demo accounts are the perfect place for trial and error.
Rules & Restrictions
It’s critical that you are aware of day-trading options rules in your country and markets. FINRA day trading guidelines on futures, for example, apply in the States. The rules stipulate that if you meet the requirements of ‘pattern day trader’ (trade more than four times in five business days), you must keep an account with a minimum of $25,000. So, if you don’t have sufficient capital to begin with, then, for now, trading may be off the cards.
While pattern day trading applies to options in the States, many other countries have no such barriers.
You may need to remember the taxes in other countries. How do you tax your profits? Will they be seen as personal income, speculative or non-speculative company profits? Your tax responsibilities will have a major effect on your earnings at the end of the day. So find out what kind of tax you are going to have to pay, and how much.
If you have a successful plan, one of the best day-trading options strategies is to try using automated tools. An algorithm can perform trades on your behalf once you have built in your parameters. This can speed up trading times, plus you can do far more trades than you can manually. It’s important to remember, however, that this is a method best used when you’ve already nailed a reliably successful strategy down.
If you use weekly options for day-to-day trading, or you transact regular AAPL options, a risk management plan is important. This will help reduce the losses and make sure you have another shot on the market at all times.
Most traders with experience advise using a rule of 1 percent. The law stipulates that on a single transaction you should never lose more than 1 percent of your account balance. So, if you have $40,000 in your account, you’d be taking a maximum position size of $400. When your plan turns out to be successful, you should find rising the risk to 2-5%.
You have two targets, as a day trader. Make money, for starters. Second, do it at minimal expense. Options are the perfect resource for day traders who want both. When day-trading nifty options, you have the freedom to set specific risk limits, and the ability to buy and sell several options to benefit from stock price fluctuations over and over again. They offer advantages other financial instruments just don’t.
There’s still enticing choices on top of that, whether you’re day trading S&P 500 options, or delta and spy options. However, as popularity for conventional alternatives rises, it is important that you use all the tools around you to claim a competitive advantage. That means plunging into books and online resources and fine-tuning your approach.
Ultimately, as Robert Arnott said, what’s easy is never successful in investing. So, enjoy the journey ahead, it could be bumpy, but it could be filled with gold, too.