Day trading option is one of the most popular strategies among successful traders around the world. One of the main reasons traders back away from trading is failing to achieve high rates of return.
Day trading options increase the chance of a higher return. Another significant aspect of day trading options is that it spans across various markets.
Traders can stock ETF options, futures options, and stock options. If you can utilize it correctly, it can be a great way to meet your financial goals.
Contents
- What are Trade Options?
- How Can You Determine Options Pricing?
- How to Find Good Day Trading Options
- Final Thoughts
- FAQ
What are Trade Options?
Before going deep into the realms of options trading, it's best to get some rudimentary ideas about it. Options are like contracts that give you the right to buy or sell an asset at a specific price at a particular date in the stock market.
Usually, it is between a few weeks or months. When you buy an option, you get the right to trade it. But you're not necessarily obligated to trade it. This non-obligatory execution system makes options trading different from another kind of financial security called “futures.”
In futures trading, you can't decline. But in the case of options trading, you have the opportunity to buy or sell at any time. You also get the ability to decline. This gives the day trader the flexibility they need to succeed in the stock market and Forex trading.
Types of Options
Many day traders often view options to be complicated and risky investments. But it is not that intricate. There are only two main classes of options.
A Stock Call Option
A stock call option allows day trade to buy options at a specific time at a special price. There are two main aspects of a stock call option. The price you pay and the end date of options contract. The price is called the strike price, and the end date for executing a call option is the date of expiration.
Suppose you want to buy an asset for $20,000 and you will buy only if it meets the criteria. A day trader can lock the price and the requirements. You will also give a time until the standards run out. Now you will be able to buy the asset only when you have the ability. Although it sounds impressive at first, there are some downfalls.
You will have to deposit some amount to the owner/seller. This is quite obvious as no seller will want to give an option without collateral in the financial markets. The money that you will deposit will be part of the total buy.
Also, you should remember that the value of the stock call options goes up when the price of underlying stock price decreases. It depends on the price movement.
There are two different types of call options. In the American style, you can purchase the underlying asset any time you want till the expiration date. But in the European style, you can only buy it on the expiration date. So, it's best to choose the type beforehand to avoid complications.
Stock Put Options
As the name suggests, a stock put option means you will sell money trading stocks at a specific time at one special price. The value of the put option is proportional to the price of the underlying stock price. If the stock price falls, the value of the put options also falls.
Put options have expiry dates as well. It also follows the same style as the call options. Suppose you fix the strike price at $20 per share. You have the power to sell this stock at any moment till the expiration of the options. You may ask why I should buy call options.
Well, the plus point here is even if the value goes down, you can get the agreed-upon price. So, you will profit no matter what happens. There are some disadvantages to it as well. You will receive a premium or down payment as a put seller. This can be off-putting to many traders.
How to Day Trade Options
Now that we know the main aspects of options contract, let's look into how you can trade. Now, day trading isn't confined in the domain of wall-street. You don't have to be physically present to trade. With the rise of online brokerages, you can day trade from your home. But you will still need a few things.
A Computer
This one is a no-brainer. To execute day trading, you will need a computer. But there are some requirements. The laptop needs to have a fast processor and sufficient memory. While running trading programs, you will often run into crashes. Sometimes it can even lag.
To avoid these kinds of technical issues, you will need a computer that can withstand them. So, that you can perform your trading programs without any interruptions.
Online Broker
An online broker provides various options to the traders. It allows the clients to open and close positions without being present physically. Back in the day, it was pretty arduous to invest and place orders. You had to call and place the orders manually.
Otherwise, you had to hire a broker with a lot of money to place the order on your behalf. But those days of misery are long gone. Online brokers nowadays can perform all the trading functions using a digital platform. Brokers like TradeStation or TD Ameritrade are great platforms that you can try out.
Fast Internet Connection
You need a stable internet connection. Although you don't need a lightning-fast connection, you at least need to have a mid-range internet package. An unstable internet connection can be the root of all the problems.
Opening a Brokerage Account
Your online broker will help you every step of the way. Currently, there are tons of online brokers. But the tricky part is choosing the right one for trading options. It's wise to consider some factors before finalizing.
Cost
Online brokers will charge you commissions for their service. All of them have different rates depending on the offers they provide. As you dive more, you will find all kinds of online brokers. You will find traders with ridiculous commissions, while some of them won't even charge you a dime for the trading options. It's wise to choose a broker that has a low commission fee with good services.
Also, many online brokers have hidden fees. They won't charge you upfront but still make money from you in ways you can't visibly see. Therefore, check beforehand.
Account Type
There are different account types you can choose from. A margin account will let you borrow money from the trader to invest in trades. On the other hand, a cash account allows you to trade only on the capital you have. So depending on how you are going to trade, choose your account type.
Platform
Brokerage platforms can be tricky sometimes. Some of them don't have a well-designed platform. Therefore, it will confuse the users. You don't want to stumble into this kind of brokerage.
It's best to choose one that offers all the technical tools and charts you need to trade options. An online brokerage with a mobile app is always handy as you don't want to be glued to the computer screen at all times.
Options Trading Strategies
There are a few effective options trading strategies. These are some general and most commonly used techniques.
As you gain more experience, you will deviate too much more advanced approaches. But for now, let's start with the basics.
Covered Calls
This is a strategy where the stocks are bought or sold on a share for share basis. In this strategy, the investor sells options equivalent to the same amount of underlying security he owns.
Option traders can profit by selling call options for the assets they hold until the stock moves above the strike price.
Married Puts
This strategy is different from the last option as it allows you to sell even at the strike price. In this strategy, a long investor buys put options that are most likely to have a strike price lower than the current price. Traders use this strategy to protect shares against significant falls and crashes of the underlying stock.
Long Straddle
This strategy is for the confused traders out there, including myself. It's hard to predict which way the price of the underlying asset is going. Is it going up or down? For many novice traders, it's hard to answer the question. For them, a long straddle is the best strategy. You can buy a call and put options for the same asset with the same price and expiration time. Therefore, you don't have to worry much about the market crash and spikes.
Tips for Trading Options
No one becomes a successful day trader in a day. There will be plenty of failures along the way. But there are some tips you can incorporate to increase your chance of becoming successful when you trade options.
A Robust Trading Strategy
Most traders make the same mistake repeatedly by getting into options trading without a viable strategy. This happens because we often visualize trading as a luxurious task where no amount of work is required. That's how movies and the media portray trading.
But the reality is quite different. Without a strategy, you will most likely be going to fail. If you follow a good strategy, you can incorporate it in different market conditions. It will indicate you when to put money into the options market and when not to. There are a plethora of trading strategies you can follow. You can also follow the footprints of some of the interactive traders before you. You can also look at some educational resources.
Charts and Patterns
Charts and patterns are your keys to success. You can utilize them to predict future movements. You can analyze the current market to guess if there will be a spike or crash in the market. There are some key indicators that your chart should have.
They can be about money flow index, Bollinger bands, and relative strength index. Although it will require effort and practice, you will soon be able to recognize options trading patterns.
Timing
In the trading world, time is money. Ask any trader, and they will answer you without a glimpse of doubt that the central aspect they always focus on is time. It's not just the time of entering and exiting the market.
It's also about the time you set up, the power hours, and the ending hours. If you manage to trade in the right hours, you will be profitable. If you analyze the markets before the night of the trading day, you can guess where the market is heading the next day.
There are also power hours when the trading volume is at an all-time high. If you manage to trade in those times, you will have high returns.
Risk Management
Trading in the options market isn't always sunshine and rainbows. It also has a lot of risks surrounding it. The market fluctuates a lot. Therefore, you can encounter losses at any time if the market crashes. Consequently, you need a risk management strategy to avoid such unfortunate events.
It's best to follow the 1 percent rule. Many experienced traders advise using this rule to avoid losses. The rule is that you should never risk more than 1 percent of your balance on a single trade in the options market. The more you bet, the more chance of encountering loss.
Demo Accounts
Most traders can't resist themselves going all out in the day trading options. The result is often an imminent disaster. They lose all their money and never step back into the trading world.
Trading options require patience and, most importantly, practice. If you trade without having any experience, you are not going to go very far. That's why it's best to brush up on your skills in a demo account. You can find out the weaknesses and complications of your trading strategy.
Most of the demo accounts don’t require you to invest money. They work on stimulated money. Therefore, you don't have to worry about losing your hard-earned capital. It is a place where you can trial and find all the errors. It helps you become a better trader.
Volume and Volatility
Volume and volatility are an essential part of options trading. Even small fluctuations in the volume can result in profits in day trading options. Usually, there's more volatility in options than penny stocks as they are much more expensive.
As we've already mentioned, trading options have a limited time. You can't trade past the expiry date. That means you have to be more vigilant when it comes to volume and volatility.
Focus
Not to sound like the corny motivational speakers nowadays, but you have to be focused. The market moves fast. One second there will be a massive spike in demand, and the next, it can crash. So, you need to be focused on keeping up with the market.
You have to do your research diligently. You have to know which options to choose from and which ones to avoid. Also, you have to analyze the charts and indicators just like we suggested so that you can exit at the right time. One can quickly lose their calm and succumb to pressure. This pressure can lead to leaving at the wrong time with an option contract. So, you need to be focused.
How Can You Determine Options Pricing?
Options pricing usually depends on two different factors. One is the intrinsic value, and the other one is the time value. The inherent value means the potential of that option to be successful.
It is calculated by monitoring the difference between the strike price and the current price. The time value implies the measurement of volatility that affects an asset's price up. The expiration time, price of the stock, and strike price all affect the pricing.
The difference between the stock price and strike price dictates the intrinsic pricing, while the expiration date affects the time value.
How to Find Good Day Trading Options
Reading till now, you might've started wondering if it's possible to find good options trade in such a frenzy market. Well, you definitely can. With proper research and analysis, you can find the best options trader.
Technical Analysis
Technical analysis helps you understand how the stock moves in the market. By analyzing the patterns, you can predict which direction it will take and how long it will stay there.
Let's be honest. There are thousands of options to choose from. How can one choose the right one from so many options?
Technical analysis helps you narrow down these choices. You can find out the desirable and profitable traits of an opportunity as well.
Stop Order
To get a good options trade, you should set up a stop order. A stop order lets you control the trade a little bit. It means you will specify the price of an option, and when the price reaches your placed price, the order is executed.
This will help you limit the losses and increase the chances of being successful. So, be sure to discuss with your broker beforehand that you are interested in stop orders.
Advantages of Day Trading options
Low-Cost Strategy
One of the main advantages of day trading options is the low cost. Even if you have a small capital, you can invest in it. Buying an opportunity is way cheaper than buying an asset or stock.
Therefore, your entry into the market is easy. You can also exit without a hassle as you know about the expiration date.
Diversity
You can diversify your portfolio by trading options. You don't have to experiment too much. As it is low cost, you can trade in multiple options easily. It will give you more experience to be a successful trader.
Options Are More Successful
There will be a lot of sectors in the market that will fall. But options are a much more stable sector because of the volatility and diversity.
Big Gains
There's a vast potential to earn significant gains in day trading options. If there is a considerable movement in the market, you can make large profits.
Drawbacks of Day Trading Options
The main drawback of pattern day trading options is that it's hard to predict when big moves will happen. Also, you need to put in a lot of effort daily. You have to analyze all the indicators and monitor charts after charts.
Another major drawback is liquidity. Some day trading options have wide spreads. Therefore, you can't help but buy at a high price and sell at the low cost of the spread.
Final Thoughts
The possibilities are endless when it comes to day trading options. The best part about it is the flexibility. You don't have to compromise your positions. Also, by knowing the expiration date, you know when to exit.
So, you can avoid losses and tons of risks. The only bummer about day trading options is research and analyzing. You have to put in a lot of effort and work. The roads may be bumpy, but at the end of the road, you will find success.
FAQ
How much do you make by day trading options?
You can make about 10 percent to 50 percent per trade. If you have about ten thousand dollars in your account, you can make about $250-$1000 trading them.
Are day trading options profitable in the stock market?
Day trading options are risky but profitable. You don't have to hold your position overnight. Instead, you focus on the trends and movements of the market.
Can you day trade options like stocks?
Yes, you can. If you buy and sell stocks on the same day, then it is a day trading option.
