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- Options are extremely flexible instruments and can certainly be used for day trading, but you must be careful about which strike price you select for the trade. Here’s why...
"How Would You, Too, Like to Peek Into the Mind of a Former FloorTrader, Market Maker, and Specialist in DELL Computer Who Has Over 120K Career Trades Under His Belt -- and Finally Discover the Virtually Unknown, 'Insider' Trading Techniques and Strategies Proven to Make Millions for Traders Across the Globe?"
Options are extremely flexible instruments and can certainly be used for day trading, but you must be careful about which strike price you select for the trade.
Here’s why...
If you are trading stock, the only thing you must guess correctly is the direction. If you buy the stock and the price rises, you’ll make money. If you short the stock and the price falls you’ll make money. The stock’s price always rises and falls dollar-for-dollar with itself so the only thing you must guess correctly is the direction of the stock in order to make money. It doesn’t really matter how long it takes for the stock’s price to get there – just as long as it moves in your favor.
Options, however, behave differently. It’s possible that you could lose with a call option even though the stock’s price moves up. For example, assume a trader believes a stock will rise and buys a $50 call for $6.
The stock price rises from $50 to $55 at expiration. With the stock at $55, the $50 call is worth the $5 intrinsic value, which leaves the trader with a $1 loss for being correct on the direction of the stock! In this case, the trader was correct that the stock price would rise but still lost money because it did not rise fast enough. Options have a “speed” or “pace” component that must be taken into consideration in addition to the direction. Notice that a stock trader would have made money by purchasing the stock at $50 and selling at $55 while the $50 call option lost money even though both traders were correct in their bullish outlook.
Option prices do not move dollar-for-dollar until the delta reaches 1 (some systems will show this as 100 delta). At that point, the option is behaving exactly like stock. If you are day trading, you want to trade options that are stock substitutes – you want to trade high delta options. However, options with this high of a delta can be expensive but we can get very close to a stock substitute with a 0.80 to 0.85 delta option. These options will have little time premium in them but still be significantly cheaper than the stock. In the previous example, perhaps the $40 call had an 85 delta and another trader pays only $10.30 (only 30 cents time value) for it. This is significantly cheaper than the stock but will move nearly dollar-for-dollar with the stock. With the stock at $55 at expiration, this trader sells for the $15 intrinsic value and captures nearly a 50% gain.
The key point for day traders is to use relatively high delta options (80 to 85 delta) if your goal is to use them as stock substitutes.
...thanks
for the trust you've shown in MrSwing and my business.
Enjoy
your options...
Ron
Ianieri, a.k.a. “The Options Master-Maker”
Co-Founder,Options
University
Who
is Ron Ianieri, and Why Should
You Trust His Options
Insight?
Ron Ianieri is Co-Founder and Managing
Partner of OptionsUniversity.com.
A former professional options trader,
market maker, and 10-year floor trader on the Philadelphia
Options Exchange, Ron played an integral role in the
development of proprietary trading and strategic risk
management programs for large, fast-growing specialty
units. He was the specialist in DELL Computer options during
the early 90’s, when it was recorded as one of the busiest
books in history.
Ron is the active Chief Options Strategist
for The Options
University, where he continues to receive tremendous
accolades for his pioneering educational developments,
such as The
Options 101 Home Study Course and The
Options Mastery Series CD Library. He is also co-
developer of the breakthrough options volatility software Volcone
Analyzer Pro, which tells you if an option is
“cheap” or “expensive” (ultimately empowering
you to
determine which options to buy, when to buy them, and
when to sell them for safe, maximum gains).
Disclaimer
U.S. Government Required Disclaimer - Options trading has large potential
rewards, but also large potential risk. You must be aware of the risks
and be willing to accept them in order to invest in the options markets.
Don't trade with money you can't afford to lose. This website is neither
a solicitation nor an offer to Buy/Sell options. No representation is
being made that any account will or is likely to achieve profits or losses
similar to those discussed on this website. The past performance of any
trading system or methodology is not necessarily indicative of future
results.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS.
UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT
ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS
MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS
IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE
BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT
WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
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