Day trading stock options
I know that options allow you to control a large amount of stock value with a small investment. Put and call options are some of the greatest trading vehicles ever created. But day-trading the options is not one of those strategies. Options are simply the wrong tool for that particular job, like trying to cut a board with a tape measure, drive a car to an island or cook a steak in a microwave. The first issue is that of trading liquidity and bid-ask spreads. For almost all options, the bid-ask spreads, as a percentage of their value, are much too wide for day trading purposes, although not a problem for longer duration trades.
We enter and exit trades with precision timing as the price of the asset touches small-scale demand and supply zones. This can be very effective and lucrative, but it requires quick trade entries and exits. When we buy an option, if we want to get it done that quickly we will have to pay the asking price for it.
Later, when we sell it, we will have to accept the bid price. When we have the time to wait, we can avoid paying the full spread by using limit orders. In day trading there is no time for that. That alone pretty much rules out options as a day trading vehicle. Also, the thing that makes options unique is that there are three separate sets of forces acting upon their prices at all times. These expectations can and do change from moment to moment. This day trading stock options option prices to inflate or deflate, completely separately from the effect of stock price changes.
Sometimes the effects of current stock movement on the one hand, and of the expectations of future stock movement on the other hand, both act to push option prices in the same direction. But sometimes they act in opposition. Finally, there is the issue of time decay.
This puts steady pressure on option prices both puts and callswhile not affecting the underlying stock at all. So, even the best analysis of probable stock price movement alone does not give us enough information to trade options effectively, most day trading stock options over very short time frames. We also need to assess market expectations. Are those expectations too high, making options overpriced and therefore a good bet to sell short?
Day trading stock options too low, making the options an especially good buy? Answering these questions is not especially difficult, and we have great tools day trading stock options do just that. However, the effects take longer to play out than a few minutes or hours.
We can make the three option forces into three separate profit centers when we use them correctly, as taught in our Professional Option Trader class. Use the right tools for day trading, and use the finely-tuned instrument of options in the environment where they can really sing.
Options November 10, Day Trade Options? Disclaimer This newsletter day trading stock options written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, day trading stock options or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the day trading stock options of the reader.
The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.
I rarely come across a trader that has not traded options. Options strategies come day trading stock options many shapes and forms, but they are all intended to do one thing: Though I still trade options, I have a totally different perspective on how and when to trade them.
Because of the boom in technology over the past 15 years, most of the trading done today is all electronic as opposed to picking up the phone and calling a broker or the pit. And the economy of today is now global instead day trading stock options being country specific. These factors have led the trading industry to look at the markets in a broader perspective where our markets will react with what happens in Europe or Asia.
Not only this, but the markets are becoming a 24 hour market instead of just the standard 8: Since the markets are based on a 24 hour basis, we now can see how the world values our markets and get day trading stock options better understanding on how our markets will perform based on how the world has traded.
I start my trading day early 5: Though equity options day trading stock options be traded until after 8: Knowing this, by the time the U. Because of this, I like to give the market one hour before entering into an options trade. This gives the U. Looking a Chart 1, you can see the direction of the world markets and how it affects the U.
Chart 1 To trade options, I use a basic strategy. If the market is going up, I buy calls or sell puts. If the market is going down, I sell calls or buy puts. I prefer to be a seller of options rather than a buyer; however, there are some equities that move well enough in a day that buying the option pays better than selling the day trading stock options and waiting for it to deteriorate.
Apple is a good example of this. Apple is one of the stocks that track very well with the E-mini for this reason I will use it as an example in this article. Though stocks have individual news and can move more at times or lessthey will generally trend with the E-mini.
I then look at where the E-mini is trading based off of its open up or down and the overall direction day trading stock options the market for the day, and see if Apple is trading in the same direction based off its open. If so, I will buy an at-the-money, or first strike out-of-the-money, call if heading higher, or put if heading lower. I then give the market 30 minutes to see if the direction I traded is right.
If so, I place a stop day trading stock options half of the value I paid for the option, i. If the market has turned and I am not getting paid, I will get out of the position and look for another opportunity later. If the trade is going in my direction, then I will reevaluate it at 1: If the market reverses, then I get out. If the market continues in my direction, I stay with the trade and move my stop just to the other day trading stock options of the open by about 10 cents and then look to re-evaluate the trade at 2: Chart 3 shows Apple and the E-mini on May 26, The E-mini started higher day trading stock options continued the trend going into 9: The closest strike would have you buying the June call on Apple.
Chart 3 Chart day trading stock options This is just one example of a stock that can be traded throughout the day. Using the direction of the futures to get the trend shifts the odds in your favor of getting paid.
There are many stocks out there, just verify that they trend with the E-mini before using them in this manner. Tom Busby is founder of DTI and a pioneer in the trading industry as a world-recognized educator. He takes a complex subject, the global markets, and puts it into an easy-to-understand language for all levels of traders and investors. He is a member of the Chicago Mercantile Exchange Group and has been a professional securities trader and broker since At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too.
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