Do you want to day trade options? Are you aware of what options trading consists of? Do you plan to be a pattern day trader? If the answer to any or all of these questions is yes, then this article may be helpful to you, so that you can better understand the process of buying and selling stock options, including buying and selling options contracts on the same business day.
Just like stock or ETF trading, buying and selling (or selling and buying) the same options contract on the same day will result in a day trade. It’s the same contract if the ticker symbol, strike price, expiration date, and type (call or put) are all the same.
The purpose of this article is to provide some basic information about buying and selling options on the same trading day. However, before discussing the same-day trading, a brief overview of options contracts is provided below.
For Starters, What is an Option?
An options contract is a financial contract that gives the buyer the right, but not the obligation, to buy or sell a specific quantity of an asset at a specific price on or before a specific date. The value of the option is tied to the underlying stock price.
A call options contract for a particular stock gives the buyer the right to buy shares of the underlying stock at a specified price, while a put options contract gives the buyer the right to sell shares of the underlying stock and the related stock price. One option contract typically represents the right to buy or sell 100 shares of the specified stock.
How Do Options Contracts Work?
An options contract’s strike price is the price at which the buyer can choose to exercise the contract and buy or sell the underlying stock on or before the contract’s expiration date. If the contract buyer chooses not to execute the contract by the expiration date, the option will simply expire and no transaction takes place.
In exchange for the flexibility provided by an options contract, the buyer pays a premium for the contract upfront. This premium is included in the price of the options contract and is largely based on the amount of time before contract expiration.
As the expiration date approaches, the time value premium of an option contract declines. If the option contract buyer allows the contract to expire without executing it, the trader does not recover the premium (the options expire worthlessly).
A call options contract is considered to have value, or to be “in the money,” if the contract’s strike price is below the stock’s current share price, and a put option is in the money if its strike price is above the current share price of the stock.
Call or put contracts that have strike prices that are the same as the underlying stock’s share price are considered “at the money.” Contracts that are neither in the money nor at the money are considered “out of the money.”
Like stocks, options contracts trade on public exchanges, and options trades are settled via clearinghouses. Traders can buy options contracts for stocks, stock indexes, exchanged traded funds, fixed-income products, foreign currencies, and commodities.
Additional Key Facts About Options Contracts
Traders use options contracts for several investment objectives. Options contracts can help investors generate more income from their stock holdings. They can also be used as a hedge against a market downturn. Buying a few out-of-the-money put options against a core stock holding is similar to buying insurance for that stock.
Investors can pay a small options premium for put contracts that pay off big only if the share price of the underlying stock drops sharply.
Options traders can also construct targeted, sophisticated trades by utilizing advanced trading strategies. Many of these strategies used are called bull call spreads, bear put spreads, long straddles, long strangles, and synthetic longs.
Buying Options and Selling Options On the Same Day
Now that some basics about options have been provided, we can discuss buying and selling options on the same day. Simply put, just like stock or ETF trading, buying and selling (or selling and buying) the same options contract on the same day will result in a day trade. It’s the same contract if the ticker symbol, strike price, expiration date, and type (call or put) are all the same.
Some important concepts to consider in options trading during one day of trading:
The definition of a day trade has to do with the duration of the position. If you buy and then sell a stock within the same trading session (at a current price), then it’s a day trade. And, of course, the same definition applies if you’re buying an options contract. Since options only trade between 9:30 AM and 4:00 PM EST, that means you are in and out within 6.5 hours. Sometimes the hold time will be minutes, and sometimes it will be hours. But it won’t ever be days. Holding overnight simply isn’t something that day traders do.
Pattern Day Trader Rule
Options still subject you to the pattern day trader rule, which states that you can’t do any more than three-day trades within five business days. If you execute four or more trades, then you fall under the rule’s requirements. Which states that you have to have $25,000 equity in your account. That essentially means that it is challenging for anyone to become a day trader with stocks and options if they are underfunded. Nevertheless, this is an important aspect of buying and selling options contracts on the same day.
Volatility is the lifeblood of day trading. More movement equates to a higher potential for profit. No movement equals no potential for profit. This is why day traders thrive on volatility and avoid trading boring stocks like utilities and staples. Furthermore, every penny matters to a day trader. Since their time frame is so much smaller, they are often investing for very small sums of potential profits.
All tradable instruments involve a trading cost. And I’m not talking about the commission. Instead, this consists of the bid/ask spread. This piece is sometimes considered a significant risk for using options as an investment vehicle. The options trading cost is more significant than stock, futures, and forex. To some, this potential risk makes options too much to consider – at least for day traders.
In sum, buying and selling options can be very lucrative. However, the task of learning how to know when to execute a call or put option can be overwhelming at first, and certainly requires a higher level of training in order to maximize the potential for profits and reduce potential risks.
Some Options Day Trade Loopholes
If you don’t happen to have a $25,000 to day trade, there are ways to get around that requirement. They consist of loopholes and alternative trading strategies. One basic method is to make only three day trades in a five day period. That’s fewer than one day trade per day. Following such a strategy means you’ll need to pick and choose among valid trade signals. You won’t receive the full benefit of a proven strategy.
Another strategy is to 0pen accounts with different brokers. This is a less-attractive choice. However, if you open two accounts, you can make six day trades in a five-day period—three trades for each broker. This, of course, is not a great solution. If you already have limited capital, each account is likely to be quite small. Day trading with such small accounts isn’t likely to produce much income. With small amounts in each account, you are limited in the options you can trade. Some brokers may not even accept the small deposit.
Summary: Can I Buy and Sell Options on the Same Day?
The answer to Can I Buy and Sell Options on the Same Day? Yes, you can! Day trading is skyrocketing in popularity as more and more people are looking for financial freedom and the ability to live life on their own terms. It takes time and dedication to learn the intricacies of the world of day trading. But with the right information and careful planning, you can put yourself in a position to earn a great living. To learn more about options and buying and selling options on the same trading day, earning profits, and generating income, see the link below for further details.
To Learn More
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”