How to day trade using options
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 causes 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. I then look at where the E-mini is trading based off of its open up or down and the overall direction of 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 at 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 side 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 and continued the trend going into 9: The closest strike would have you buying the June call on Apple.
Chart 3 Chart 4 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 plenty more opportunities out there. If the market continues in your direction you could stay with it and place your stop to the other side of the open by around cents. If it continues to look promising you can re-evaluate again at around 3: You can then make a final decision and hopefully count your profits.
Even with nifty options day trading techniques, you can always benefit from invaluable tips. From risk management and stock options tips to education and rules around tax, below you will find top tips that could keep you firmly in the black. One of the top tips is to immerse yourself in the educational resources around you. The best traders are constantly digesting information. The Jeff Augen day trading options PDF is available for free download and considered one of the most useful resources out there.
However, you should also consider the following:. It can be difficult to resist the urge to throw your hat into the ring early on. However, getting to grips with stock options strategies with a demo account first is often a wise decision. Demo accounts are the ideal place for trial and error.
However, whilst pattern day trading does apply to options in the US, many other countries do not have such barriers. In other countries, you may need to consider taxes. How will your profits be taxed?
Will they be considered as personal income, business income, speculative or non-speculative? Your tax obligations can seriously impact your end of day profits. So, find out what type of tax you will have to pay and how much? This can speed up trading times, plus it can allow you to make far more trades than you could manually.
This will help you minimise your losses and ensure you always get another crack at the market. As a day trader, you have two objectives.
Secondly, do so with minimal risk. Options are the ideal instrument for day traders looking for both. When day trading nifty options, you have the ability to set clear limits on risk, and the ability to buy and sell the options multiple times to profit again and again from stock price movements.
They offer advantages that other financial instruments simply do not. That means diving into books and online tools, as well as honing your strategy. Brokers Reviews 24Option Avatrade Binary.