Day Trading Options

Options provide a great deal of leverage with limited risk.

This is a good start for anyone who wants to day trade and has limited margin. However, to be successful in day trading options, you have to be discerning in the equities you choose to day trade.

Four criteria are to be considered to be successful in day trading options:

First, there must be adequate daily movement in the underlying equity. You need a certain amount of volatility in that stock or ETF, especially when the options strategy used relies on price movement in order for the objectives to be met.

Second, you need techniques and methods to anticipate market movement in any one direction or the lack of it, depending on what kind of strategy your trading is built upon. The Law of Charts and using Probabilities and Standard Deviations are just some of the ways of achieving this anticipation with 70-80% probability of success.

Third, you must trade an ITM (in-the-money), ATM (at-the-money) or OTM (out-of-the-money) option(s), according to your trading plan, desired profit targets and your trade management rules for achieving them.

Some traders like a large delta – the higher the better, let’s say at least 75 – and target a specific, relatively small profit percentage, coupled with a high probability of achieving this objective on consistent basis. Others go for 50 or less, as their goal is to see the option’s premium double during the very same trading session.

Fourth, you want a small Bid/Ask spread.

The last criterion is important because you have to overcome the bid / ask spread before you start to make a profit. You will most likely be entering and exiting with market orders, and the spread is a cost to you.

A good equity in which to day trade options is SPY. It is an ETF based on the S&P 500, and tracks the S&P futures at a ratio of approximately 10:1. The most lucrative part of SPY options is the usual $.01 – $.02 spread. With a spread like this, day trading options is almost like trading the actual ETF at a fraction of the margin requirements!

 

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