Why You Should Add This to Your Trades
There are several benefits of including options trading in your repertoire as a day trader.
For one, options are a natural progression from futures, which day traders commonly trade.
Options have a lot in common with futures. They often have the same underlying assets and have pretty similar structures, so adding options to the mix will feel familiar in many ways.
However, it’s important to remember that while they have many similarities, options are not futures and they cannot be treated identically.
Here are some of the specific benefits of day trading options:
One of the biggest draws to day trading options is that it’s a low cost strategy for trading. This is a great advantage, especially if you have a small account.
To buy an option is significantly less expensive than buying the underlying asset or the shares of a stock. This means that your entry into a trade is easy, and comparatively low impact on the wallet.
Since there’s an expiration date on the contract, you also know from the get go that the exit is going to be easy: you’ll just have to make a decision about whether to execute or not by a certain date.
Options are a great way to diversify your portfolio without venturing too far outside of your day trading comfort zone.
Since you can buy in to an options contract for a cheaper amount than buying the actual stock, you have the potential to explore a number of different opportunities.
However, don’t go nuts, because remember: while you do have the option to execute or not, if you choose not to by the time that the contract expires, you’re still out the initial premium. These fees can add up over time if you’re not very careful about your choices.
Day trading options has the potential to net you big gains.
Because you’ve agreed on a specific price to buy or sell, if there’s a big movement in the stock’s price, there is potential for large profits.
Volatility can be an asset with day trading options, and can help you earn profits if things go well.
Say, for instance, that your contract gives you the option to buy a stock at $10 per share. If the value of that stock goes up to $40, you’re in a position where you can make a massive gain because you locked in the lower price.
Key Tips for Day Trading Options
Interested in day trading options? Awesome. However, be sure to read through these tips before you get trading for the best results.
After all, day trading options is different than day trading stocks!
Volume and Volatility
Volume and volatility are key things to look for when day trading options.
When day trading, you can look for even small fluctuations in stocks to gain profits. However, with day trading options, you need to look for a little more volatility.
Because options represent an underlying asset that is worth more, the more they move, the more you can stand to turn a profit.
The good news is that there’s generally more volatility inherent to options trading, because they represent stocks or assets that are more expensive than, say, penny stocks.
However, keep in mind that if you’re day trading options, your time is limited. This means it’s extra important to be vigilant, especially since options tend to have bigger bid-ask spreads.
In case you’re not familiar with the term bid-ask spread, here’s the lowdown. The bid is the current highest price that somebody’s willing to pay for a stock, and the ask is the current lowest price somebody’s willing to sell their stock.
The bigger bid-ask spreads can potentially lower your profits as a day trader.
I probably don’t have to tell you this, but day trading moves fast. This means that it’s vital to remain on task and focused.
This is particularly true with options trading, since there are so many things to consider and keep in mind when making this type of investment.
First, you have to make sure that you’ve been diligent in your research. Just because you’ll have the option to exercise your option or not doesn’t mean it’s without risk. If you decide not to, you’ll still be responsible for the initial buy-in.
Yes, you’d lose less than if you were to buy the stock or underlying asset outright. But this can add up over time, so it’s better to choose options that you really feel have a stronger potential to earn profits. The way to do this? Yep, research.
Stay focused. It’s important to closely monitor the charts and indicators, because you want to be able to make your exit at the right time with an options contract.
Why Do You Need Expert Assistance?
Hindsight is often 20/20 in trading. I can’t say how many times I’ve heard traders say “If only I’d done this differently …”
To a certain degree, time will be your biggest teacher, cluing you in on the lessons about how to conduct yourself in trades and how to avoid losing money.
Of course, this is only if you’re very diligent about monitoring your progress in a trading journal and really evaluating what you’re doing that is working (and what’s not).
Unfortunately, many traders don’t have the time, means, or patience to stick with trading long enough to learn the ropes on their own.
If you want to have a quicker learning curve and sail through a lot of those common money-losing rookie mistakes, consider seeking out assistance from experienced traders.
Day trading classes can be worth their weight in gold in terms of bringing you up to speed on how the stock market works and how to conduct yourself in trades.
No, it won’t make you rich instantly, but it will definitely guide you through many of the lessons you’d probably have to learn the hard way.
The Bottom Line
Day trading options can be a way to expand your trading repertoire, improve your level of diversity, and potentially gain profits.
Because trading options gives you a lot of flexibility, you can stand to profit while potentially minimizing risk since you aren’t obligated to exercise your option.
However, it’s not a trading method to be entered lightly because there are still risks and a learning curve involved. Be sure to educate yourself thoroughly before adding it to your regular trading routine.
— Tim Sykes
Editor, Penny Stock Millionaires