In the past days, options trading was not part of most traditional day strategies. However, times are changing and today traders make substantial money using options. This page will highlight the benefits and drawbacks of trading on options, as well as cover option types, how to get setup, and top tips.

 

 

What are options?

Simple definition – an option is a simple financial instrument. 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 obligated to meet the terms of the transaction. They will be sold or bought if the buyer chooses to ‘exercise’ the option before the expiration date. Options for day trading ranges across multiple 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 will have full rights with an options contract. Each contract should include the following details:

  • Option type (call or set option)
  • Security
  • Strike price (price at which you can exercise the option)
  • Trading units (number of shares)
  • Expiration date (last trading day to exercise your option)

Types

Options are often classified as complex, risky investments, and that leaves many day traders hungry. However, there are only two main classes of options.

  • Set – These  sell thisallows you to sell a stock at a specific price.
  • Call  – These call options allow you to buy a stock at a specific price.

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

  • Stock Selection
  • Index Options
  • Small options
  • Mini Index Options
  • Future Options
  • Weekly SPY Option
  • OEX Option
  • Options ETF
  • Options S & P 500
  • IRA Account
  • E-Mini Option
  • ES Weekly Options
  • QQQ Options
  • Options to earn a lot of money (ITM)
  • Crude Oil Options

Basic Asset

Typically, you will find that most options are based on shares of publicly listed companies, Twitter and Amazon for example. However, more and more options are based on alternative underlying investments. These include day-trading options on stock indices, currencies, commodities, and real estate investment trusts (REITs).

Stock selection

If you are interested in day trading stock options for a living, it is important to know contracts based on 100 shares of the underlying stock. The exception to this rule is when adjustments take place as a result of stock splits and mergers.

Regional difference

The majority of exchange-traded stock options are American. They can be exercised at any point from the date of purchase to expiration. However, the European option, you can only redeem on the expiration date.

Option versus future

A lot of people quickly realize there are a lot of similarities between day trading options and futures. Both are often based on the same basic engine. The makeup of the actual contracts also has many similarities. The difference is how they are traded. With options, you get a wider range of options available. You will also find different trading rules. Options can be traded singly, or you can buy them alongside stock exchanges or futures contracts to create a form of insurance on the trade.

 

 

Why choose to trade?

There are a number of reasons you might take serious money trading options. Even financial compensation aside, day trading with options appeals for a number of compelling reasons.

  • Low Cost Strategies – Day trading gives you the opportunity to enter and exit positions faster and with less risk than other securities, such as stocks and mutual funds. For instance, it is also significantly cheaper to buy an option than to buy the underlying asset, for example shares of stock. So you can control the same number of shares with much less capital.
  • Diversity – Since options are so much cheaper than buying actual stocks, you can benefit from an increased number of investment opportunities. Your capital will go further, increasing your profit potential.
  • Greater Gains – When the stock moves, you can benefit more with an option. Let’s say a stock moves from $25 to $50. That would give you a 100% interest in the stock. However, a call option that goes from $1 per contract to a $5 contract will give you a 500% gain. Therefore, you can profit more and in less time with one option.
  • Options can succeed where others fail – While some sectors of the market fail, options can succeed. This is partly because you don’t need to exercise your option to profit from it. Plus, volatility itself can be profitable.
  • win-win – While options are often built on stocks, combine the two and they can give you greater benefits. This is because you can sell your options to generate income on stocks you already own.

Day options trading is multifaceted and offers great profit potential. The best part though – accessibility. You can start day trading with options from anywhere in the world. All you need is an internet connection.

Restrictions

While there are many benefits, there are certain challenges that come with trading in options. Fortunately, all of the obstacles listed below can be overcome.

  • Broad bid margin – Compared to stocks, bid spreads are usually wider. This is the result of reduced liquidity in the options markets. This can fluctuate by as much as half a point, which can reduce the profitability of a day’s trade.
  • Reduce Price Movement – You may find price movement is limited by the time value factor of your option premium. Although the value increases with the price of the underlying instrument, the gain can be weakened to an extent by the loss of time value. Fortunately, the time value for options day trading is relatively limited.

Neither of these downsides should stop you from opting for day trading for income. If you take both considerations into account, you can tailor your trading plan accordingly.

 

 

How to start trading options

Day trading options for beginners requires following a few simple steps.

Open a brokerage account

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

  • Cost – Compare commissions between different brokers. You will even find some brokers that offer zero commissions on trading options. Also, checking their fee structure is simple and has no hidden costs. You have to make sure you are getting the competitive spread.
  • Account Type – Do you want to start your day trading option with a cash account or do you want a margin account? With a cash account, you can only trade the capital you actually have. However, a margin account will allow you to borrow money from your broker to take advantage of trades. Margin call option will help you to increase your buying power. It is worth noting that a cash account will only allow you to buy an option to open a position. You will need a margin account to sell an option without owning the underlying asset.
  • Platform – This is where you will spend a significant amount of time. The best platform for trading options will provide all the charting and technical tools you need to trade effectively. If you trade on the go, you may also want to investigate their mobile and tablet apps.

For more guidance on making the right decision, see our broker list .

Strategy

Once you have set up with a broker and you have your own trading room ready, you will need to employ an effective strategy. Strategies for day trading options come in all shapes and sizes, some simple and some complex. Before we look at an example, there are a few essential ingredients that most strategies will need.

Chart & template

Unless you trade news, you will probably use charts and  patterns to predict future price movements. They work on a simple premise, that history repeats itself and you will find many wealthy traders agree wholeheartedly with that statement. Your chart will require the best indicators for trading options. They vary from strategy to strategy, but they include:

  • Set call rate metrics
  • Cash Flow Index
  • Open interest
  • Relative Strength
  • Bollinger Bands

You will find that sample trading with options takes a lot of work and practice. You will need to work out any creases and try several different charts until you find one that is clear in numbers.

Time

Timing is everything. Not only when you enter and exit trades, but also when you are setting up for the upcoming trading day. Options strategies that work usually have a trader behind them who is bright and early. For example, you might want to get up as early as 06:00 ET if you want to get a feel for the direction of the markets going through Europe and into the US opening. You can start setting up your trading strategy based on what your market has been up to all night. Take the E-mini as an example, up to 70% of stocks will move in the same direction as the E-mini. If you know this, you can also tell if most stocks will open or fall when the US markets open at 9:30 a.m. ET. It is worth remembering that the United States often dictates world markets. So it makes sense to wait an hour for the market to settle somewhat before entering your first trade. Day trading on options requires careful analysis and considerable time. Make sure you are willing to put in hours if you want to make a substantial profit.

Example

This is one of the basic options strategies that work. If the market is rising, you will buy calls or sell put. If the market is falling, you will sell calls or buy put. Many people prefer to sell options rather than buy them. However, some stocks move so well that buying the option can provide a bigger profit than selling the option and waiting for it to go down. Apple is one such example. Let’s go back to the E-mini. You will be patient for the first hour and then you will see if the E-mini is trading on your open and if Apple is trading in the same direction based on the open. If that’s the case, you’ll buy an out of money call, or make the first call if the title is higher, or put if the title is lower. Now you sit back and wait for half an hour to see if you trade in the right direction. If so, you will stop half the value of the option you bought. So, if you bought it at $10, you would place a stop at $5. If the market turns around then get out. There are many opportunities out there. However, if the trade looks promising then you would wait a few hours and reassess at 2:00 ET. If the market continues in your direction, you can stay with it and place your stop to the other side of the 8-12 cent range. If it continues to look promising, you can reassess around 3:30 p.m. before the market closes. Then you can make the final decision and hopefully calculate your profit. For more guidance, see our strategy page .

 

Tips for trading options

Even with convenient options day trading techniques, you can always benefit from invaluable tips. From risk management and stock-picking tips to education and tax rules, below you’ll find top tips that can help keep you on your toes.

Education

One of the top 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. Jeff Augen Day Trading Options PDF is available for free download and is considered one of the most useful resources available. However, you should also consider the following:

  • Books & Ebooks
  • Course
  • Chat rooms
  • Video tutorial
  • PDF files (e.g. Tom Demark’s day trading options pdf)
  • Forum
  • Blog
  • Podcasts

Demo account

It can be hard to resist the urge to throw your hat in the ring early. However, getting to grips with stock options strategies with a demo account first is often a wise decision. Not only can you address any weaknesses in your trading plan, but you can also try out the broker’s platform before you buy. They are funded with simulated money, so you don’t have to worry about risking your hard earned capital. The demo account is the perfect place for trial and error.

Rules & restriction

It is important that you are aware of the rules for day trading options in your country and market. For example, in the US, there are FINRA day trading rules about options. The rules state that if you meet the ‘sample day trader’ criteria (trading more than four times in five business days), you must keep an account with at least $25,000. So if you don’t have substantial capital to start with, trading may no longer work. However, while sample day trading applies to options in the United States, many other countries do not have such a barrier.

Taxes

In other countries, you may need to consider taxes. How will your profits be taxed? Will they be considered personal income, business income, speculative or non-speculative? Your tax liability can seriously affect your end-of-day profit. So find out what tax you will have to pay and how much? For further instructions, see our tax page .

Software

One of the best day trading options tips if you have an effective strategy is to consider using automated software. Once you have programmed your criteria, the algorithm will execute the trade on your behalf. This can speed up transaction times, plus it can allow you to make more trades than you can do manually. However, it is important to note that this is a tool that is best used once you have implemented a consistently effective strategy. For further instructions, see our software page .

Risk Management

Whether you trade daily using weekly options or you trade AAPL options daily, a risk management strategy is essential. This will help you minimize losses and ensure you always get another crack in the market. Many experienced traders recommend using the 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 size you will lose is $400. Once your strategy translates into consistent results then you can consider increasing your risk by 2 – 5%.

Take away points

As a day trader, you have two goals. First, make money. Second, do so with minimal risk. Options is the ideal tool for day traders looking for both. When trading options conveniently during the day, you have the ability to set clear limits on your risk and your ability to buy and sell options multiple times to profit multiple times from stock price movements. They offer advantages that other financial instruments simply do not have. Above all, whether you are trading S & The P 500, or delta and spy options, always have attractive options. As popularity for traditional options grows, it is important that you use all the resources around you to claim a competitive advantage. That means diving into books and online tools, as well as honing your strategy. Finally, as Robert Arnott said,  invest in investments, comfort rarely pays off . So enjoy the road ahead, it can be bumpy, but it can also be lined with gold.