Day trading options has become very popular these days. However, it wasn’t as popular as today and wasn’t part of the past’s conventional intraday strategies. Conversely, today’s investors are more involved in day trading. So, what is the reason for such growing popularity of day trading, particularly day trading options? The reason is the current economic environment. It is extremely volatile yet presents myriads of opportunities. Thus, investors want to capitalize on the situation.
However, day trading and options trading are both very complex. If you want to merge both of them, you have to be fully prepared. In fact, day trading options isn’t something that you should consider without proper preparation as well as planning. That’s why we decided to help you out. Our today’s post is a guide on day trading options. We are going to highlight is day trading worth it? Additionally, the post also includes how to do intraday options trading.
What is day trading?
Day trading is a popular type of trading that involves buying and selling financial assets within a very short time period. Day traders trade for just minutes or hours with the aim of making a bunch of small profits. However, these small profits add up and turn into huge gains over time.
The rise of online trading platforms and mobile applications played a huge part in the ever-increasing popularity of day trading. Nowadays, everyone with a smartphone and an internet connection can jump on the day trading bandwagon. However, just because it is easy to trade doesn’t mean it is a piece of cake. So, if you want to do day trading, it requires a lot of effort.
What are the options?
Options are financial instruments that are based on the prices of the underlying securities such as stocks. They, in fact, enable traders to trade on the underlying asset. Each options contract has an expiration date. Each holder needs to exercise his/her contract by the expiration date. Options also require you to learn a few terms such as strike price, calls, and puts.
- The Strike price is the price stated on an option
- Call options are options contracts that enable holders to buy underlying assets at strike prices within a specific time period.
- Put options, on the other hand, enable holders to sell underlying assets at the strike price within a specific time period.
What is day trading options?
Day trading options has become one of the most popular types of trading. It involves buying and selling weekly options contracts. Traders buy and sell within a few seconds, minutes, or hours. They buy options contracts that are about to expire within a week or two. Traders may also go for contracts with same-day expiration as they are comparatively less expensive. After buying contracts, they wait for the right set up and sell on the same day.
Day trading options – Is it really worth it?
If you choose to play as a day trader, then deciding what financial instrument you will trade is the next step. There are numerous options for you for day trading. However, the cheapness, as well as leverage, make options one of the best bets for intraday trading. That’s why modern-day traders are day trading options. Moreover, for traders who don’t have bags full of money or those who don’t want to tie up the whole amount necessary for stock trading, then options are the best way. In short, options bring the following key advantages:
- Options are your allies for a tactical approach to trading as they require smaller investments. They are also flexible when it comes to timing and risks.
- Options are more appealing to day traders because the associated time period is short. Thus, they enable traders to buy and sell options regularly.
- Options trading also enables traders to hold a leveraged position in the underlying security at a lower cost.
- Options also reduce risk exposure and that is why investors often use options contracts for hedging.
So, options offer various advantages that make them one of the best instruments for day trading as well. Now, one major question arises here and that is “Is day trading options really worth it?” The answer is yes. Let’s try to understand through an example. It will help you find whether to day trade options or not.
For example, you are holding a call option. It allows you to buy a particular underlying security such as a stock at today’s price three days from now. If the stock’s price rises, you can buy it below the price. Conversely, if the price doesn’t rise as you hoped, you can easily sell that option before the expiration date. Thus, options also enable you to mitigate your losses when things don’t go as well as you hoped.
Additionally, liquidity is another big reason why options are good tools for intraday trading. Selling a stock sometimes takes a lot of time because you have to find a potential buyer. Conversely, options empower you to buy or sell your options immediately. That’s the liquidity that options bring. Thus, you won’t lose money while waiting for a potential buyer.
Therefore, options are really worth it. They are perfect for day traders who buy or sell instruments within the same trading session. They don’t need big capitals either. So, options are also good for traders of all sizes. That’s almost perfect! However, it is also important to note that day trading options is totally different from day trading other instruments like stocks. Moreover, not all types of options contracts are suitable for day trading.
Day trading options – how to do it?
Day trading options is undoubtedly a good way to make profits without investing loads of money. However, it is also important to get yourself fully prepared. Moreover, you should also know how to analyze stocks before embarking on a day trading options journey.
Initial steps to starting day trading options
Day trading options isn’t a straightforward thing where you can start right away. Here are a few crucial steps you need to take for successful day trading options.
- There are three market trends you can capitalize on as a day trader. These trends are rising, falling, and sideways. However, it is the best approach to choose only one of these categories. Focusing and concentrating on one category yields better results than getting involved in everything. It is even more important to choose one category when you are a new trader.
- Secondly, there are minimum capital requirements you need to meet for day trading options. There is a rule that you have to follow. The rule is that you can only trade thrice in five business days. If you want to trade four, five, or more times, you have to maintain a minimum balance of $25,000 in your brokerage account. If your capital drops even by one dollar, you cannot day trade.
- Thirdly, you need to understand the fact that day traders thrive on volatility. Therefore, it is absolutely imperative to choose stocks that have high demands. Otherwise, you won’t be able to make money.
- Fourthly, spend some time analyzing different options broker. You need reliable and top options brokerage services. Besides looking for the standards of service and features, you also need to consider fees. However, there are some top options brokers that offer the best services at very competitive prices.
Day trading options – strategies
Day trading is a difficult endeavor and options make it even more complicated. Therefore, you need a solid strategy to make profits in this arena. If you somehow become an expert in a logical and effective strategy, you might make substantial profits.
1. Long Call and Put
The most basic day trading options strategy is long call and put. It involves holding call options if the price is going up. Similarly, go for the put options if the price is going down. However, it is important that you are absolutely sure about your anticipation. If such opportunities knock on your door, options are the best way instead of buying stocks. Because premiums are very low as compared to gains you make. Additionally, you can cash in on your position immediately.
The main benefit of the long call-and-put strategy is that it is pretty simple to execute. However, it also carries risks such as your maximum losses may be high as compared to other strategies if you incorrectly speculate on prices. Moreover, you also need to be careful about the completion of your trade. If you don’t complete your trade before the expiry of the options, your trade will be as good as zero.
2. Bull Call Spread
A bull call spread is a strategy for stocks experiencing an upward trend. This strategy involves buying one option while selling another with a high strike price. Thus, you will make maximum gains when the stock price reaches a point between the strike prices of the two options. Although bull call spread strategy offers limited profit potential, it also offers lower risks than buying a call option. Additionally, it yields profits much higher than the maximum loss it might incur.
3. Bear Put Strategy
Bear put strategy is totally opposite to the bull call spread strategy. This strategy, as opposed to bull call spread, works specifically in a downtrend. It involves buying a long put option while selling another short put option with a lower strike price. Thus, you can make maximum profit when the price of the stocks reaches a point just above the strike price of the option sold. Again, this strategy also yields limited profit. However, it carries a lower risk than buying a put option. Additionally, it also offers maximum profit as compared to the maximum loss you may incur.
Straddle is another day trading options strategy that enables you to earn profits as well as a hedge against risks. This strategy involves buying a call and a put option with the same strike price and expiration date. Thus, you are speculating a stock price as well as against it simultaneously. So, it doesn’t matter whether the stock price goes up or down. However, it is important that the movement should be big enough. That means your gross profits should be higher than the premium paid.
You can straddle when you aren’t sure about the direction of the price movement. For example, when some major events occur, their effects on price are gigantic, and straddle becomes extremely fruitful in such circumstances. However, you should be careful about the magnitude of the price movement. If the price doesn’t go up or down significantly, your premiums will be higher.
Strangle is another day trading options strategy that involves buying two options – one call and one put option. However, the strike prices of both options should be different – higher call and lower put. Moreover, more substantial price movements are prerequisites to the execution of strangling. That means straddle is suitable for moderate price movements. Conversely, strangle is only specific to more dramatic price movements. Although strangle is riskier than straddle but it offers maximum reward potential.
Butterfly day trading options strategy is a very complicated one as it involves four options. Firstly, it requires selling two call options with the same strike price. The strike price of these options is usually the current price of the underlying stock. Secondly, the strategy requires buying two call options one with lower while one with a higher strike price. Butterfly, however, works in stagnant conditions where stock prices don’t move significantly. Thus, it is one of the safest strategies in volatile markets. However, it also has some disadvantages such as buying four options that minimize your gains.
Day trading options – some tips
Day trading options is a good strategy. However, it requires you to be disciplined in order to hit success. Here are a few tips for you if you want to be a successful options day trader.
- Trading is a risky arena where being disciplined is a great virtue. It requires you to hold your long-term goals tightly and always remain rational and disciplined. Moreover, you have to avoid panic decisions just like experienced traders who don’t make panic decisions. As day trading never makes you rich overnight. Therefore, you have to be patient, disciplined, and consistent.
- You also need to be good at hedging risks. Successful traders always keep tabs on the risks. They use strategies that also minimize risks besides being profitable. Moreover, you also need to be clear about the percentage of your capital you would invest. Additionally, you can also diversify your portfolio as much as possible. These measures help you minimize your risks.
- Staying updated on the latest market, geopolitical, and economic news is also vital. A single major event can cause a dramatic increase in a company’s stocks and vice versa.
- Another important habit you need to develop is to keep learning. Knowledge is power and it brings you success. Having said that, you should always look at improving and improvising your strategies to the changing markets.
- Although it is very difficult to resist the excitement of entering real trades and making money, still it is better to start with a demo account. A demo or virtual account not only enables you to practice and learn. It also enables you to develop and backtest your strategies. Thus, you can practice as well as refine your strategies without risking your capital.
- Another important thing that you need to consider is technology. Modern software and bots help you automate your trading. Additionally, they also empower you to make more trades than manual trading.
Day trading is a popular type of trading that involves buying and selling financial assets within a very short time period. Day traders trade for just minutes or hours with the aim of making a bunch of small profits. However, these small profits add up and turn into huge gains over time. Moreover, it isn’t always the case. Day traders also make huge sums of money in a single trade.
Day trading options, in particular, are a comparatively new phenomenon. Traders used to day trade stocks or other securities. However, day trading options have become very common nowadays, especially after the outbreak of COVID-19 in 2020. The pandemic crisis disturbed normal ways of living all across the globe. Eventually, people turned to trade for making a living. Day trading options became popular because of several reasons.
Day trading options, no matter how popular, isn’t a piece of cake. It requires you to fully prepare yourself. Moreover, there are certain things you need to know and learn. Then it comes to strategies. Without having a proper strategy, you cannot day trade options. Therefore, get yourself fully prepared before throwing your hat into the ring.