In the past, trading options was not part of most traditional daily strategies. However, times are changing and today’s traders are making quite a bit of money using options. This page highlights the advantages and disadvantages of options trading, covering options trading, option types, how to set them up, and top tips.

 

 

What are Options?

Simple Definition – An option is a simple financial derivative. This legal agreement provides the right to buy or sell assets on or within a pre-determined date (exercise date). If you are a seller, you are obligated to meet the terms of the transaction. If the buyer chooses to ‘exercise’ the option before the expiration date, it becomes a sell or a buy.

Daily trading options span multiple markets. You can get stock options, ETF options, futures options and more. These traditional options are also referred to as ‘vanilla options’.

 

What is an options contract?

Many rights are granted through options contracts. Each contract must contain details of:

  • Option type (call or put option)
  • Basic Security
  • Exercise price (the price at which an option can be exercised)
  • Trading unit (number of shares)
  • Expiration date (last trading day to exercise option)

Types

Options are often classified as complex and risky investments, and attract many aspiring day traders. However, there are two main classes of options.

  • Put – This sell option allows you to sell a stock at a specific price.
  • Call – This buy option allows you to buy a stock at a specific price.

Aside from the two main classes, there are many different markets and options available. Not all are suitable for daily trading, but the list includes:

  • Stock options
  • Index options
  • Mini Options
  • Mini index options
  • Future Options
  • Weekly SPY Options
  • OEX Options
  • ETF Options
  • S & P 500 option
  • IRA account
  • Electronic mini options
  • ES Weekly Options
  • QQQ options
  • In-The-Money (ITM) Options
  • Crude Oil Options

The underlying asset

Typically, most options are based on stocks in publicly traded companies Twitter and Amazon. However, there are more and more options based on alternative underlying investments. It includes daily trading options on stock indices, currencies, commodities and real estate investment trusts (REITs).

Stock Options

If you are interested in stock trading options for a living, you should be aware that the contract is based on 100 shares of the underlying stock. An exception to this rule is when adjustments are made as a result of stock splits and mergers.

Regional differences

The majority of exchange-traded stock options are US. Can be exercised at any time from the date of purchase until expiry. However, European options are only available on the expiry date.

Options vs Futures

Many people quickly recognize that there are numerous similarities between day trading options and futures. They are usually based on the same basic instrument. The construction of real contracts also shares numerous similarities.

The difference is how you trade. Options allows you to use a wide range of options. Also, the trading rules are different. Options can be traded individually or purchased together with stock trades or futures contracts to create a form of insurance for a trade.

Why trade options?

There are many reasons you can make serious money trading options. Even in terms of financial rewards, day trading with options is attractive for several compelling reasons.

  • Low-Cost Strategies – Option day trading offers an opportunity to draw and exit positions faster with less risk than other securities such as stocks and mutual funds. It is much cheaper to buy an option than to buy the underlying asset, for example shares of a stock. So you can control the same number of shares with much less capital.
  • Diversity – You benefit from increased investment opportunities because options are much cheaper than buying real stock. Your capital will go further and increase your profit potential.
  • Greater Benefits – As your inventory moves, you get more benefits from options. Let’s say the stock moved from $25 to $50. That will give you a 100% stock gain. However, if the call options go from $1 per contract to $5 contracts, you can make a profit of 500%. Thus, options allow you to earn more and less time.
  • An option can succeed if the other sectors fail. An option can succeed if some sector of the market fails. This is partly because you don’t have to exercise an option to make a profit. Also, volatility itself is profitable.
  • Mutually beneficial – options are often stock-based, but greater benefits can be obtained when both are combined. This is because you can sell options to generate income on stocks you already own.

Intraday options trading is multifaceted and offers great profit potential. But the best part is accessibility. You can start daily trading on options from anywhere in the world. All you need is an internet connection.

 

 

Disadvantages

Despite the numerous benefits, there are certain challenges associated with options trading. Fortunately, all of the obstacles listed below can be overcome.

  • Wide bid risk spreads – Compared to stocks, bid risk spreads are often wider. This is a result of the reduced liquidity found in options markets. This can fluctuate by half a point, reducing your daily trading profits.
  • Reduced price volatility – Price volatility can be limited by the time value component of the option premium. Profits may be damaged to some extent by the loss of time value, even though their value increases with the price of the underlying commodity. Fortunately, the time value of options day trading is relatively limited.

These two drawbacks do not prevent daily trading options from earning searches. If you consider both, you can adjust your trading plan accordingly.

How to start trading options

Daily trading options for beginners require a few simple steps.

Open a brokerage account

Brokers help facilitate traders. There are numerous online brokers to choose from today. The challenge is finding one that fits your individual needs. A number of factors must be considered when choosing.

  • Cost – Compare fees between different brokers. Some brokers have zero commissions on trading options. Also, make sure the fee structure is simple and there are no hidden charges. You need to secure competitive spreads.
  • Account Type – Would you like to start trading options daily on a cash account or a margin account? Cash accounts allow you to trade only the capital you actually have. However, a margin account allows you to borrow money from your broker to take advantage of your trades. Margin currency options allow you to increase your purchasing power. It is worth noting that cash accounts can only purchase options to open positions. A margin account is required to sell options without owning the underlying asset.
  • Platform – This is where you can spend a lot of time. The best platforms for trading options provide all the charting and technical tools you need to trade effectively. You can also look into mobile and tablet apps if you are trading on the go.

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

Strategy

After setting up as a broker and preparing your trading room, you need to come up with an effective strategy. Strategies for day trading options come in all shapes and sizes, some simple and some complex. Before looking at the examples, there are a few prerequisites for most strategies.

Charts and Patterns

Unless you are trading using news, charts and patterns can be used to predict future price movements. They operate on a simple hypothesis, and history repeats itself, and you can find many wealthy traders who wholeheartedly agree with that statement.

Charts need the best indicators for trading options. Each strategy is different, but includes:

  • Currency rate indicator
  • Money Flow Index
  • Disclosure Interest
  • Relative Strength Index
  • Bollinger Bands

You may find that pattern trading with options takes a lot of effort and practice. You will have to refine the wrinkles and try several different charts until you find one that paints a clear picture with the numbers.

Timing

Timing is everything. Not only when entering and exiting trades, but also when setting trade days. Options strategies that work are usually bright and have early riser traders.

For example, if you want to get a feel for the direction of the market going through Europe and into the US, you might want to wake up as early as 06:00 EST. You can set up a trading strategy based on what you did in the market overnight.

For example, with E-mini, up to 70% of stocks move in the same direction as E-mini. Knowing this, you can also tell whether most stocks will open or close when the US markets open at 9:30 AM.

It’s worth bearing in mind that the US often dictates the direction of world markets. Therefore, it makes sense to wait an hour or so for the market to stabilize somewhat before entering your first trade.

Daily trading on options requires careful analysis and a significant amount of time. Be willing to put in the time to make a significant profit.

yes

This is one of the basic options strategies that work. If the market is rising, you will either buy a call or sell a put. If the market is declining, you sell calls or puts. Many people prefer to sell options rather than buy them. However, some stocks do so well that buying an option will make you a bigger profit than selling the option and waiting for it to go downhill. Apple is one such example.

Let’s go back to the E-mini. After being patient in that first hour, we’ll look at where E-mini is trading on a public basis and whether Apple is trading in the same direction on a public basis.

If so, you either buy money, call lower if it’s heading higher, or put in if it’s heading lower. Now you sit back and wait for 30 minutes to make sure you traded in the right direction. If so, you should stop at half the value of the option you bought. So if you buy at $10.00, you can stop at $5.00.

Get out when the market changes. There are more opportunities. However, if the trade looks promising, you should wait a few hours and reevaluate at 2:00 PM ET. If the market continues in your direction, you can hold it and place a stop opposite the open around 8-12 cents.

If it continues to look promising, it may re-evaluate again around 3:30pm before the market closes. You can then make your final decision and hopefully calculate your returns.

Tips for trading options

Even with fancy options day trading techniques, you can always benefit from valuable tips. From risk management and stock option tips to education and tax rules, below you’ll find useful tips to get it right.

Education

One of the best tips is to immerse yourself in the educational resources around you. The best traders are constantly digesting information. You don’t want to fall behind as the market changes. The Jeff Augen Daily Trading Options PDF is free to download and is considered one of the most useful resources. However, you should also consider:

  • Books and eBooks
  • Process
  • Chat room
  • Video tutorial
  • PDF (e.g. Tom Demark day trading options pdf)
  • Forum
  • Blog
  • Podcast

Demo Accounts

It can be hard to resist the urge to throw your hat into the ring early. However, it is a wise decision to first figure out stock option strategies with a demo account. Not only can you address weaknesses in your trading plan, but you can also try out a broker’s platform before making a purchase.

They are funded with mock money so you don’t have to worry about risking your hard earned money. A demo account is an ideal place for trial and error.

Rules and Restrictions

Know the rules for daily trading options in countries and markets. For example, the US has FINRA day trading rules for options. The rules stipulate that you must have an account with at least $25,000 if you meet the ‘Pattern Day Trader’ criteria (4 or more trades in 5 business days). So, if you don’t have a lot of capital to start with, trading may be out of the cards for 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 need to consider taxes. How are your profits taxed? Is it considered personal income, business income, speculation or non-speculation? Your tax obligations can seriously affect your ending profits. So, what type of tax do you have to pay and how much should you pay?

Software

If you have an effective strategy, one of the best trading options tips is to consider using automated software. Program it according to your criteria and the algorithm will execute the trades on your behalf. This shortens your trading time and allows you to do a lot more trades than you could do manually. However, it is important to note that this tool is best utilized when you have already established a coherent and effective strategy.

See the software page for detailed instructions.

Crisis management

A risk management strategy is essential whether you are trading day-to-day with weekly options or AAPL options on a daily basis. This allows you to minimize your losses and always get another crack at the market.

Many experienced traders advise using the 1% rule. The rules stipulate that you should never risk more than 1% of your account balance in a single trade. So if you have $40,000 in your account, your maximum position size is $400. If your strategy changes to consistent results, you might consider increasing your risk to 2-5%.

far point

As a day trader, I have two goals. Make money first. Second, do it with minimal risk. Options are an ideal tool for both day traders. When day trading fancy options, you can set clear limits on your risk and buy and sell options multiple times to continue to profit from stock price movements. They offer advantages that other financial products simply do not.

Besides that, S & Whether you day trade P500 options or go for delta and spy options, there are always compelling choices. But with the growing popularity of traditional options, it’s important to leverage all the resources around you to gain a competitive edge. That means diving into books and online tools and honing your strategy.

As Robert Arnott put it, “comfortable things in investing are rarely profitable.” So enjoy the road ahead. It may be bumpy, but it may also be lined with gold.