Day trading stock options is very lucrative and an easy way to get started in trading the market.
Question: Would you be more likely to correctly pick the winner of a football game with two minutes to go in the game OR a week before the game is played? Of course you’d have a better chance in picking the winner with just two minutes left in the game!
When we look at trading, do you think you would be better able to predict the direction of any stock or commodity within the next hour OR over the next week, month or year? We would argue that it’s much easier to predict a stock’s direction, with the correct trading knowledge, within the next hour to produce a winning and profitable trade.
That in a nutshell is why Day Trading gives you significant profit potential. And on top of that, day trading stock options gives you leverage.
Let’s dig into this a bit more but we first need to define what a stock option is:
A stock option is a contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock at a predetermined price from/to the option seller (writer) within a fixed period of time.
That’s what options are but here’s the reason to trade options. First and foremost, trading options provide you phenomenal leverage! Options are very cost efficient.
Example: When you think of buying a share of stock, you may typically think of buying and holding that share long term. You’ll buy a share(s) at the current share price…let’s say for this example, XYZ Company at $200/share. You now own that ONE share with an investment of $200.00.
Now compare that with an Option for that same XYZ stock. Again for this example, let’s say you buy a “call” option (meaning you think the stock price will go up) for $1 dollar. Now here’s the kicker…instead of buying and owning that one share of XYZ stock, in buying the option you would be buying one “option contract” which controls 100 shares of XYZ stock at the established “strike” price. In this case, $1.00/share.
In other words, in buying the option at the $1.00 strike price, you would control 100 shares of XYZ stock for only $100.00 without the obligation of owning the stock. Now that’s leverage!! And just like owning the underlying XYZ share, if the XYZ stock goes up – the option also goes up. But now you are reaping the benefits of leverage, pretty sweet!
One main difference between owning a stock vs. an option is that options “expire” where the stock does not. This means the value of the stock option will become worthless and the option contract will be considered invalid at a specified time and date in the future. Once you buy a share of stock you own that stock. With an option you have a specific time frame for how long you can hold that position before it expires.
Terms You Need To Know
The two types of stock options are “Calls and Puts”. Call options gives the buyer the right to buy the underlying stock while Put options give the buyer the right to sell them. Yes, a bit confusing but understand if you buy a Call option, you believe the underlying stock price will go up and if you buy a Put option, you believe the underlying stock price will go down. And yes, you can make money trading options no matter if the stock price goes up or down! Compare that with only making money if the stock price goes up if you buy and own a stock outright.
A Note of Caution: When you BUY a Call option or BUY a Put option, there is a known limited risk to you. However, if you SELL a Call option or SELL a Put Option there is unlimited risk and you can lose your shirt! There are strategies which involve the Selling of Call and Puts, but we would avoid those until you have significant training. And even then, we would ask why you would want to.
We tell all of our Students at SafeDay Trading: “Day trading stock options are very lucrative and an easy way to get started in trading the market. However, when day trading always USE YOUR STOPS.”
In trading ourselves, we typically risk 10% on an option trade. So if we buy 5 contracts and the strike price is $1.00; we would need $500 to place the trade. Our Stop would be placed so our maximum loss if things go wrong would be $50.00. We can easily risk $50 to make $500.
Typically, our target is to make between 50% and 100% in 30-60 minutes with the trade. So in this case we would be looking at getting out of the trade when the Option price was above $1.50. (Of course there are other factors when choosing an exit point that we’ll address in future articles) You may be asking – how often does that happen? Answer every day! You just need to know which stocks are best suited for Day Trading Options and concentrate on those particular stocks.
The strike price is the price at which the underlying asset is to be bought or sold when the option is exercised. We like to purchase the options at one strike in the money. We seem to get the best value ratio at this level.
Option contracts are wasting assets and all options expire after a period of time. Once the stock option expires, the right to exercise no longer exists and the stock option becomes worthless. It goes without saying the longer you hold an option you lose value.
What Is The Criteria For A Good Day Tradable Option?
There must be volatility, there must be sufficient volume, and the stock must match your risk tolerance. You should research the stock and know what makes it tick. Understand its history. Yes, that means the fundamentals are important.
When to Enter the Trade?
The key to be an effective and profitable trader is being able to correctly predict direction of the market and the specific instrument (stock, commodity, Forex pair) that you are trading. After you have spent your time to understand the fundamentals, now it comes down to your technical trading skills. Understanding candlesticks, momentum, direction, and having a proven trading system.
We’ll be addressing each of these areas in future articles.
Options have the potential to deliver high percentage returns but also losses. There are many risks associated with trading options and educating yourself is particularly important. This one article does not cover all you need to know about options, but we hope it perks your interest in learning more how options may play in your trading plan.
Do you want to learn more about day trading and day trading stock options? We invite you to sign up for our FREE SafeDay Trading Mini-Course. You'll discover that the FREE SafeDay Trading Mini-Course is more robust and of higher educational value than most other trading courses that charge high fees!