Options Theory: How To Day Trade Options
No doubt, trading options is the most trending thing in the stock market these days. But it is considered a tricky procedure or just for experienced investors. With the correct knowledge, almost any investor can attempt options. Options allow for diversification. The benefits can be as massive as the risks.
It involves trading instruments that grant the right to buy or sell a specific security at a particular price. It is a contract related to an asset, such as a stock or other securities. Options contracts are valid for a specific time, which can be a day or several years. You can trade the underlying asset if you buy an option, but you do not require it. Choosing to do so is known as exercising the options or forex trading.
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What Is Day Trading Options?
A day trade means the duration or period of the position. A day trade is when you buy and sell stock inside the same trading session. The exact meaning applies when buying an options contract. Option trades between 9:30 AM and 4:00 PM EST, so you are in and out for approximately 6.5 hours. The hold duration varies from minutes to hours, but not days.
If you plan to day trade, the next step is to choose a vehicle. The cheapness and leverage of options may be appealing. If you do not have a big account or want to hold stock, you might choose options.
How To Trade Day Options?
There are a few points that you need to keep into consideration, and those include the following:
Day Trader Type
As far as we know, options still fall under the pattern day trader regulation, limiting you to three trades each week. If you make four or more deals, you must have at least $25,000 in your account. It means that being underfunded makes it challenging to become a day trader with stocks and options. But there are alternatives.
Day trading thrives on volatility. More movement means more profit potential whereas, no mobility brings no profit. That is why day traders avoid dull stocks like utilities and staples. Know that a day trader’s every penny counts. They are only playing for dimes, quarters, and maybe a buck, but that does not mean you are talking pennies. Remember that you can multiply a 25 cent profit by several hundred dollars.
Every marketable instrument has a cost, and know that it does not mean commission. Instead, it is the bid or asks spread. The vehicle’s Achilles heel is trading at a higher cost than stocks, futures, and currency. And it makes them unsuitable for day trading.
For instance, Apple Inc. currently has one penny’s bid/ask spread ($185.20 x $185.21). The one-month at-the-money call option has a ten-cent bid or asks spread, i.e., $4.75 x $4.85, which is ten times! Additionally, you can split the spread to reduce it. Using options instead of shares requires a higher increase in the underlying stock to offset the spread.
Also, we will suggest you stick to liquid stocks. Even though Apple is one of the most actively traded stocks, the option spread was five times bigger than the share spread. It gets worse if you use illiquid names, so try not to.
Significance Of Delta
Options spreads are not suitable for day trading, but that makes sense if you utilize these to replace long or short stock. We recommend you to buy 100 AAPL shares, and your delta is +100. Surprisingly, that is $100 for every $1 rise. To substitute an option, you must buy one with a more significant delta. For day trading, you must purchase in-the-money calls/puts. They would not be responsive enough to the stock to provide a decent return for a cheap investment. But know that the bid/ask spreads expand as you move further in.
The Bottom Line
Day trading can help you diversify your portfolio while also increasing your chances of earning a greater rate of return. Although you should be aware of the potential risks with this form of trading, it is also crucial to be mindful of the advantages that you can gain from it. By gradually introducing yourself to the world of options trading, you may quickly broaden your knowledge and move past your rookie status.