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Day Trading Options Strategies That Should Know As Daytraders

Charlie Brooks

Jul 26, 2022 16:57


Options trading is attractive to traders because it often requires a smaller initial commitment and allows easier loss management. By combining the benefits of options trading with the rapid speed and possible rewards of day trading, you have several potential profit chances. Options trading daily may be used to diversify your trading portfolio and perhaps generate income.

What Are Day trading options?

Option trading for daily revenue is a highly common method. Here, options buy and sell weekly option contracts. Typically, they buy contracts with one to two weeks until expiration and buy at the money or one strike in the money. Frequently, individuals will buy products with a same-day expiration date since they are less expensive. They wait for favorable conditions and profit on a stock's short-term momentum. They sell in seconds to many minutes. Occasionally, meetings may be held throughout the day.

How Do Day Trading Options Works?

A contract for options permits you to buy or sell an asset for an agreed-upon price within a certain time period. Therefore, traders may use these contracts to wager on the value of a certain asset.



In this respect, options differ greatly from stocks. Instead of purchasing shares directly, you can acquire a contract that permits you to buy or sell the underlying securities at today's price at a future date. Therefore, if you can accurately estimate the price movement, you will profit; however, if you make a mistake, you may still sell your contract and exit your position before incurring a significant loss.


This type of trading involves more than the relatively simple act of buying and selling equities. Nevertheless, day traders favor these financial instruments since they may rapidly hedge risk using options and initiate and end positions. Overall, if properly executed, this slightly more sophisticated trading method can provide superior profits.

Why Trade Options?

There are several reasons why trading options may provide substantial profits. Even disregarding monetary compensation, day trading with options is appealing for a number of reasons.


Low-cost strategy– Day trading in options enables you to join and exit positions faster and with less risk than other products, including stocks and mutual funds. Purchasing an option is also less expensive than purchasing the underlying asset, such as stock shares, and this means that the same number of shares may be controlled with less capital.


Diversification - Since products are less expensive than purchasing the actual stock, you have more investment choices. Your capital will stretch further, improving your profit potential.


Greater benefits– When the stock option fluctuates, you might profit more using options. Suppose a stock's price increases from $25 to $50. This would result in a 100 percent increase in shares. However, shifting a call option from $1 per contract to $5 would result in a 500 percent profit.


Success while other market sectors fail - While other market sectors fail, options might be successful. This is partially due to the fact that you do not need to execute your option in order to earn from it. Additionally, volatility might be lucrative.


Mutually advantageous - Although options are frequently based on stocks, combining the two might result in higher benefits for both parties. You can sell your option to generate revenue from your current stocks.



Intraday options trading is multifaceted and offers possibilities for profit. The greatest advantage, though, is accessibility. Day trading may be initiated from anywhere in the world, and you only require an Internet connection and a reputable broker.

What Kinds of Options Exist?

Options may appear more difficult than stocks, but there are just a few fundamental types: one for purchasing stocks, one for selling stocks, and one for placing cash wagers on stock prices. Here is how each one operates.

Put Options 

A put option is a contract that permits the holder to sell shares (often 100 per contract) at the current market price for a specified time period. If you believe a stock will lose value in the future, you may purchase a put option and sell the shares at a premium when its price falls.

Call Options

In contrast to put options, call options provide the right to buy equities at today's price within a certain time period. If you are optimistic about a stock, you may purchase a call option and buy the shares at today's price in the future, when it will be far more valuable.

Binary Options 

Binary options have two conceivable outcomes, yes or no, as their name indicates. These options have an expiration date, and you benefit if the underlying asset's price is over the strike price at that time. It's that simple: you wager on the direction of the price, and if your prediction is accurate, you get paid.


Here, the payout is fixed; if you correctly estimate the future price of a stock, for example, you are immediately compensated. In some ways, binary options are akin to gambling, which is why this sort of trading is heavily regulated and even unavailable to some brokers.

Benefits of Day Trading Options

Here are a few of the particular advantages of day trading options:

Low-Cost Strategy

One of the greatest benefits of day trading options is that it is a low-cost trading method. This is a significant benefit, particularly if you have a modest account.


Buying an option is considerably less expensive than purchasing the underlying asset or company shares. This indicates that entering a trade is simple and has little financial impact.


Since the contract has an expiration date, you also know from the outset that the exit will be simple: you'll only have to decide whether to execute or not by a particular date.

Diversity

Options are an excellent method to diversify your portfolio without leaving your day trading comfort zone.


Due to the fact that purchasing an options contract is less expensive than purchasing the underlying stock, you have the ability to buy a variety of chances.


Despite the fact that you have the option to execute or not, if you choose not to by the time the contract expires, you will still be responsible for the initial price. These costs can accumulate over time if you're not careful with your decisions.

Big Gains

Day trading options can result in substantial profits.


Because you've agreed on a precise price to buy or sell a stock, there is the possibility for substantial gains if the market fluctuates significantly.


If things go well, volatility may be an asset in day trading options and help you gain profits.


Consider that your contract allows you the option to buy a stock at $10 per share. You are in a position to make a substantial profit if the value of that stock rises to $40 since you have locked in the lower price.

Should You Day Trade Options? 

Trading options are a different beast compared to stocks, currency, and other financial assets. Options provide several advantages, including the ability to hedge risk and high liquidity. This is what it means:


For instance, if you have an option that allows you to buy a stock at today's price two days from now and the value of the stock rises, you may buy it at a discount. You can sell your losses by selling the option prior to its expiration if things are not going as planned.


However, options are a more liquid trading instrument than equities. Before you can sell a stock, you must essentially locate a buyer, which might take a great deal of time. Contrarily, an option is a contract that gives you the immediate ability to buy or sell the underlying asset. Options are advantageous for day traders since you will not lose money while waiting for a buyer.


Options also make it easier to hedge risk since you may sell your options contract if it appears you will lose your wager. For instance, if you feel a stock's price will rise in the future, you might purchase a call option. However, if it suddenly begins to decline before the option's expiration, you can sell your contract (at a little reduced price) to limit your losses; this would be much more difficult than a plunging stock.


Options need a significantly smaller initial investment than stocks, which is still another highly attractive feature. If you use options and leverage your transactions, you do not need to buy a complete share of a stock in order to profit from it. This implies that you may utilize borrowed funds to execute low-risk transactions and earn greater earnings than if you used your own funds alone.

How Much Capital Is Required for Day Trade Options?

Many novice traders ask how much capital is required for day trade options. Day trading options for income adhere to the same margin requirements as trading equities. If your account balance is less than $25,000, you must comply with the Pattern Day Trading (PDT) guideline. With a margin account under $25,000, you are permitted three same-day transactions per five working days. Therefore, you must choose the correct direction the stock is moving.


If you have a margin account and you've reached the maximum number of trades allowed per the PDT rule, you're done trading for the week.


If you have a cash account, you can day trade every day until you run out of funds.


The cash then settles overnight (T-1), and you may begin again. 5 days a week. Therefore, if you have $5,000 in your account and just trade options, you may trade with $5,000 until you run out of purchasing power. The following day, you can repeat your actions.

What Is The Disadvantage of Trading Options?

Therefore, if the advantage of day trading is its frequency, the disadvantage is its cost.


Each time a trade is executed, a fee is charged. This expense is little yet significant. As spreads and commission fees are frequently greater for options, day trading can be more expensive than for stocks.


The expense of trading may also render thousands of successful on-paper strategies worthless in practice. Tiny transaction costs can often wash out small advantages. Some retail merchants will assert that their transactions are commission-free. Frequently uninformed that their order flow is being sold and that their fill prices will drop as a result.


You are considered the product if you do not pay for the merchandise. In practice, significant edges in the high-frequency region are uncommon, and even modest edges are frequently swiftly arbitraged out.


Remember our example of a slot machine. After playing the machine two thousand times and increasing bets each time, the machine will run out of money. Thereafter, the game is over. Or, when you leave the machine to go to the restroom, someone who witnessed your achievement may have taken your seat. There is competition everywhere.

Best Day Trading Options Strategies

Cash-Secured Puts

The cash-secured put technique can provide revenue and allow investors to purchase a company at a lower price than they would be able to with a conventional market buy order.


A non-owner investor writes a put option on Miner CC with a strike price lower than the current market price of the shares. The investor must have sufficient funds in their account to pay the cost of purchasing 100 shares in each contract in the event that the underlying security falls below the strike price at expiry (in which case they would be obligated to buy).


This method is often employed when an investor's opinion on the underlying asset ranges from optimistic to neutral. The option writer obtains inexpensive shares while retaining the premium. Alternatively, if the company trades sideways, the writer will still earn the premium but will not receive any shares.

Covered Call 

This safe long strategy needs you to possess the underlying asset and sell the call options you've written for it. If you hold shares of XYZ, you may write call options with a high strike price and sell them to eager purchasers; this is a benefit of having XYZ shares.


Typically, if the price of XYZ rises over the strike price, you will incur a significant loss. However, if the price increases, you may simply sell your shares to offset your losses.


In contrast, if the price of XYZ does not reach the strike price of your option, then you win since the option you sold expires worthless. The covered call strategy is employed by investors who believe their equities will appreciate over the long term but do not anticipate considerable growth in the near future. If executed properly, this strategy can allow you to maximize the profit potential of your slow-growing investments.

Long Call and Long Put Option Strategies

Long calls and long puts are positions placed in underlying securities utilizing options rather than the underlying asset itself.


A long call utilizes call options to wager on a rise in the underlying security's price, whereas a long put uses put options to wager on a decline in the underlying security's price.


Option traders employ these straightforward strategies when they are certain of the direction and magnitude of an expected price movement.


Long calls and puts are the best strategies for maximizing profits when a trader has a high degree of confidence in predicting future price changes. This is due to the fact that options cost a relatively small premium compared to the potential increase in their value resulting from large changes in the price of the underlying security.



Long calls and long puts carry the risk that the price will not move sufficiently in the desired direction, and the options may expire worthlessly or fail to cover the entire cost of the premiums, resulting in a trading loss on the position.

Straddle 

If you enjoy risk management, you can always straddle. This approach involves the option of call and puts options with the identical strike price and expiration date. You are essentially betting on stock and against it at the same time, and it doesn't matter whether the price goes up or down as long as the fluctuation is significant.


To earn a profit in this manner, the price must rise or fall sufficiently for your gross gains to exceed the total premiums you paid for both options. For instance, if the cost of the call option was $10 and the cost of the put option was $8, you are profitable if you earn more than $18 from this trade.


Traders utilize straddles when they are uncertain about the price's direction but believe the fluctuation will be significant. For example, a trader may employ this strategy just prior to a significant press conference when a corporation will reveal its latest major initiative.


A straddle is a risk-free approach to profit from these significant price fluctuations. However, if the price does not fluctuate sufficiently, your total premiums will exceed your gross profit and incur a loss.

Short Calls or Naked Calls

When an investor sells call options, he or she is often negative or neutral on the underlying stock. Typically, the investor sells the call option to a third party. The initial investor must deliver the shares if the person who purchased the call exercised the option.


Short calls are similar to covered calls, with the exception that the investor selling the options does not already own the underlying shares; hence the term "naked calls." Therefore, they are risky and unsuitable for novice investors.


Investor A offers Trader B a call option with a strike price of $100, while the underlying stock of Energy Stock is now trading at $90. This means that if Energy Stock never reaches $100 per share, Investor A will retain the premium received from selling the call option.


Investor A is liable to sell the underlying shares to Trader B if Energy Stock shares climb over $100 to $115 and Trader B exercises the call option. Therefore, Investor A must buy the shares for $115 per share and give them to Trader B, who must pay only $100 per share.

Butterfly 

The butterfly technique is somewhat more complicated because it requires a total of four options. First, you must sell two call options with the identical strike price, which is often the underlying asset's current price. Then you must buy a call option with a higher strike price in addition to a call option with a lower strike price.


Suppose you sold two call options for a total of $50 and purchased two others for $40 and $35 each. In this instance, your maximum loss is $25, and your maximum gain is similarly $25.


The butterfly method is used to wager on modest price changes; if the change is small, you benefit, but if it is more than anticipated, the two options you sold protect you against significant losses.

The Bottom Line

Day Trading Options demonstrates innovative strategies for generating exceptional earnings with low risk. Trading options on a daily basis is comparable to trading stocks, indices, and other instruments. First and foremost, you must be able to examine equities to determine whether they are worth trading; nevertheless, the type of assets you trade will rely on your overall trading strategy.


Using options, it is possible to profit from growing, falling, and static stocks, but it is recommended to choose only one of these categories; focusing on one sort of trading will provide better returns than dabbling in many. This is particularly true if you are a novice trader seeking to learn how to trade options.