In the past day trading options were not part of most traditional intraday strategies. However, times are changing and today traders are making significant money with the help of options. This page highlights the pros and cons of options trading, as well as the types of options, how to get setup, and the best tips.

 

What are options?

The simple definition – an option is a simple financial derivative. This legal contract gives you the right to buy or sell an asset on or within a predetermined date (exercise date). If you are the seller, you are bound by the terms of the transaction. It is to sell or buy if the buyer chooses to ‘exercise’ the option before the expiry date. Options for day trading across different markets. You can get stock options, ETF options, futures options, and more. These traditional options are also known as ‘vanilla options’.

What is an option contract?

You get a number of rights with an option contract. Each contract must contain details of the following:

  • 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)
  • Expiry date (the last trading day for exercising your option)

Types

Options are often classified as complicated, risky investments, and this puts off many aspiring day traders. However, there are only two main class options.

  • Put – These put options allow you to sell a share at a specific price.
  • Call  – These call options allow you to buy a stock at a specific price.

Apart from the two main classes, there is a long list of different markets and options available. While not all are suitable for day trading, the list includes the following:

  • 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

Usually you will find that most options are based on shares in listed companies, for example, Twitter and Amazon. However, there is a growing number of options based on alternative underlying investments. These include options for day trading on stock indices, currencies, commodities and real estate investment trusts (REITs).

Stock options

If you are interested in day trading stocks, it is important to note that the contracts are based on 100 shares of the underlying stock. The exception to this rule is when adjustments occur as a result of stock splits and mergers.

Regional differences

The majority of the exchange-traded stocks are American. It can be exercised at any time from the purchase date to the expiry date. European options, however, you can only exercise on the expiration date.

Options vs Futures

Many people quickly realize that there are many similarities between day options and futures contracts. Both are usually based on the same underlying instrument. The composition of the actual contracts also has many similarities.

The difference is how it is traded. With options, you get a wider variety of available options. You will also notice that the trading rules are different. Options can be traded individually, or you can buy them along with stocks or futures to create a form of insurance.

Why trade options?

There are a number of reasons why you can make serious money trading options. Even putting financial compensation aside, day trading options for several attractive reasons.

  • Low Cost Strategy – Day trading with options gives you the opportunity to enter and exit positions faster and with less risk than other securities, such as stocks and mutual funds. It is also significantly cheaper to buy an option than to buy, for example, the underlying asset, the shares of the stock. So you can control the same number of shares with much less capital.
  • Diversity – Because options are so much cheaper than buying the actual stock, you can take advantage of a greater number of investment opportunities. Your capital will go further and increase your profit potential.
  • Bigger Profits – If the stock moves, you can profit even more with an option. Suppose a stock moves from $25 to $50. This would give you a 100% stake in stocks. An option option to move from $1 per contract to a $5 contract would get you 500% more. Therefore, you can profit more and in less time with an option.
  • Options can succeed where other sectors fail – although some sectors of the market fail, options can succeed. This is partly because you don’t have to exercise your option to take advantage of it. Moreover, volatility itself can be profitable.
  • Mutually beneficial – although options are often built on stocks, combine both and it can bring you greater benefits. This is because you can sell your option to earn income on the shares you already own.

Trading options within options is versatile and brings with it a large profit potential. However, the best part is – accessibility. You can start day trading options from anywhere in the world. All you need is an internet connection.

 

 

Nadele

Ondanks die vele voordele, is daar sekere uitdagings verbonde aan die verhandeling van opsies. Gelukkig kan al die struikelblokke hieronder gelys word.

  • Wye verspreiding van bod-vra – In vergelyking met aandele, is die verspreiding van die bod-vra gereeld groter. Dit is die gevolg van die verminderde likiditeit wat in die opsiemarkte voorkom. Dit kan tot ‘n halwe punt wissel, wat die wins van ‘n daghandel kan verminder.
  • Verlagings in prysbeweging – U kan vind dat prysbeweging beperk word deur die tydwaarde-element van u opsiespremie. Ondanks die waarde wat toeneem met die prys van die onderliggende instrument, kan die wins tot ‘n mate ondermyn word deur die verlies aan tydwaarde. Gelukkig is die tydwaarde vir die verhandeling van opsies op die dag relatief beperk.

Albei hierdie nadele behoort nie u opsies vir daghandel te verhoed in die soeke na inkomste nie. As u albei oorwegings in ag neem, kan u u handelsplan dienooreenkomstig aanpas.

How to start trading options

Day trading options for beginners requires a few simple steps.

Open a brokerage account

Your broker will help facilitate your traders. There are numerous online brokers to choose from today. The challenge is to find one that meets your individual needs. You should consider a number of factors when making your choice.

  • Costs – Compare the commissions between different brokers. You can even find some brokers that offer no commission charges for trading options. Also check that the fee structure is simple and that there are no hidden charges. You need to make sure you get competitive spreads.
  • Account Type – Do you want to start a day trading option in a cash account, or do you want a margin account? With a cash account, you can only trade the capital you have. However, a margin account allows you to borrow money from your broker to earn trades. Options in the margin will give you increased buying power. It is worth noting that a cash account only allows you to buy an option to open a position. You need a margin account to sell an option without owning the underlying asset.
  • Platform – this is where you are going to spend a significant amount of time. The best trading options platform offers all the charts and technical tools you need to trade effectively. If you’re trading on the go, you might also want to check out their mobile and tablet apps.

Consult our broker list for more information on the right decision.

Strategy

Once you have a broker, and your own trading space is ready, you need to use an effective strategy. Day trading options strategies come in all shapes and sizes, some simple and some complicated. Before we look at an example, there are a few important components that most strategies need.

Graphics and Patterns

Unless you’re trading the news, you’ll probably use charts and patterns to predict future price movements. They operate on a simple hypothesis that history repeats itself, and there are many wealthy traders who wholeheartedly agree with the statement. Your chart will need the best indicators for trading options. This varies from strategy to strategy, but it includes the following:

  • Set call ratio indicator
  • Cash Flow Index
  • Open interest
  • Relative Strength Index
  • Bollinger Bands

You will find that options trading takes hard work and practice. You need to iron out any creases and try a number of different cards until you get a clear picture with numbers.

Timing

Timing is everything. Not only when you enter and exit the trade, but also when you forecast on the day. Option strategies that work usually have a trader behind them who is early and early.

For example, you might want to be as early as 6:00 am ET if you want to get a feel for the direction of the markets moving through Europe and opening in the US. You can start setting up your trading strategy based on what your market has done overnight.

Take the E-mini for example; up to 70% of the stock will move in the same direction as the E-mini. Knowing this will also help you know whether most stocks will be up or down when the US market opens at 9:30 a.m. ET.

It is worth bearing in mind that the US often sets the direction of world markets. So it is wise to wait an hour for the market to settle somewhat before starting your first trade.

Day trading options requires careful analysis and significant time. Make sure you are willing to put in the hours if you want to earn significant profits.

Example

This is one of the basic options strategies that work. If the market is rising, you will buy or sell calls. If the market is declining, you will sell calls or buy puts. Many prefer to sell options than to buy them. However, some stocks are doing so well that buying the option can yield bigger gains than selling the option and waiting for it to go downhill. Apple is an example.

Let’s go back to the E-mini. You would be patient in that first hour and then you see where the E-mini is trading based on its open, and if Apple is trading in the same direction based on its open.

If this is the case, buy an at-the-money put, or exit your out-of-the-money call if you go higher, or if you go lower. Now you sit back and wait half an hour to see if you traded in the right direction. If so, you will stop half the value of the option you bought. So, if you bought it at $10.00, you would place the stop at $5.00.

If the market turns, get out. There are many more opportunities out there. However, if the trade looks promising, you will wait a few hours and evaluate at 2:00 PM ET. If the market continues in your direction, you can stick with it and place about 8-12 cents on the opposite side of the open.

If it still looks promising, you can reconsider before the market closes around 3:30 PM ET. You can then make a final decision and hopefully count your winnings. Consult our strategy page for more guidance.

Trading Options Tips

Even with a handy options trading technique, you can always benefit from valuable tips. From tips on risk management and stock options to education and tax rules, below you’ll find top tips that will keep you firmly in the black.

Education

One of the most important tips is to immerse yourself in the educational resources around you. The best traders are constantly digesting information. You don’t want to be left behind when the market changes. The Jeff Augen Day Trading Options PDF is available for free and is considered one of the most useful resources out there. However, you should also consider the following:

  • Books and books
  • courses
  • Chat rooms
  • Video tutorials
  • PDFs (eg Tom Demark day options pdf)
  • forums
  • Blogs
  • podcasts

Demo Accounts

It can be hard to resist the urge to throw your hat in the ring early. However, it is a good decision to first get a demo account with stock options strategies. Not only can you spot any weaknesses in your trading plan, but you can also try out your broker’s platform before you buy.

It is funded with simulated money, so you don’t have to worry about risking your hard-earned capital. Demo accounts are the ideal place for testing and error.

Rules and restrictions

It is important that you are aware of the day trading options rules in your country and markets. In the US, for example, there are FINRA daily rules on options. The rules state that if you meet the ‘pattern day trader’ criteria (trading more than four times in five business days), you must maintain an account with at least $25,000. So, if you don’t have significant capital to start with, the trade may be tentative right now.

However, while pattern day trading applies to options in the US, many other countries do not have such barriers.

Taxes

In other countries, you may have to consider taxes. How are your profits taxed? Is it considered personal income, business income, speculative or non-speculative? Your tax obligations can seriously affect your profits at the end of the day. So determine what type of tax you have to pay and how much?

Software

One of the best tips for day options if you have an effective strategy is to consider using automated software. Once you program in your criteria, an algorithm will execute trades on your behalf. This can speed up trading time, and it can allow you to make many more trades than you could do manually. However, it is important to note that this is a tool that is best used if you have already nailed down a consistent effective strategy.

Risk management

Whether you day trade weekly options, or you trade daily AAPL options, a risk management strategy is essential. This will help you minimize your losses and ensure that you always get another crack at the market.

Many experienced traders recommend using a 1% rule. The rule states that you should never risk more than 1% of your account balance on a single trade. So, if you have $40,000 in your account, the maximum position you would take is $400. Once your strategy has consistent results, you can consider increasing your risk to between 2-5%.

Take away points

As a day trader you have two objectives. First, make money. Second, do it with minimal risk. Options are the ideal tool for day traders looking for both. When you day trade options, you have the ability to set clear limits on risk, and you can buy and sell the options multiple times to profit from stock price movements over and over again. It offers advantages that other financial instruments simply do not have.

Whether you are trading S&P 500 options, or delta and spy options, there are always attractive options. However, as the popularity of traditional options increases, it is important that you use all the resources around you to gain a competitive advantage. This means diving into books and online tools, as well as leveraging your strategy.

Ultimately, as Robert Arnott said, “investing comfortably is rarely profitable.” So enjoy the road ahead, it may be bumpy, but it may also be lined with gold.