This article is intended to provide some basic information about day trading options. It is assumed the reader knows enough about trading generally and knows some basic information about day trading. Having said this, a definition of what an option is may be helpful.
In its most simple form, an option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date. There are two types of options: (1) a put, which is a bet that a stock will fall; and (2) a call, which is a bet that a stock will rise. Because it has shares of stock as its underlying asset, stock options are a form of equity derivative and may be called equity options.
Now that we have that basic definition out of the way, we will move into the walkthrough of day trading options.
Equipment and Wifi
Day trading of any kind requires good equipment and internet service. This seems like a no-brainer, but it cannot be overlooked or underestimated. The following provides some very basic and common sense guidelines on what you should have to day trade options:
- Computer: Day trading options involves a review of day trading charts and graphs and small print on the trading screen. This includes very small numbers and words. Thus, having a fairly new computer with a high processing speed is incredibly important, so the trader can see all necessary charts and numbers clearly. It makes the day trading job much easier.
- Work Station: As with any profession that requires careful attention to detail, it is important that an options day trader have a quiet workspace. It does not have to be anything elaborate, but have some type of secluded location to focus will help the trader when important trades need to be made during day without distraction.
- Wifi: Similar to having a modern and fast computer, it is incredibly important to have reliable and fast internet service. On any given trading day, a trader may only make a few trades. Those trades are based on a lot of research, time and effort. Once in the market (either by placing a call or put), the trader cannot have the potential risk that he or she loses his connection to the internet. The trades are time sensitive, and if you lose your connection, you may risk significant loss as a result.
Day Trading Options Has Become More Mainstream
Historically, trading options was not a traditional investment strategy. However, with the rise of home offices (largely from the COVID-19 pandemic), things have changed dramatically. In addition to more people working from home, there are many more people starting their own businesses (e.g., social media influence or creating a business on Youtube.com or Instagram). In many cases, these people have multiple sources of income, and day trading has become a popular option. With this trend, more people have learned that day trading options can be very lucrative, if their trading strategy is thoughtfully planned out.
Important Things to Know About Options
The following section will walk through important topics related to options, and options trading.
The Option Contract
A day trading investor has certain rights with an options contract. Each contract should include details of the following:
- Underlying security
- Type of option (call or put option)
- Unit of trade (the number of shares)
- Strike price (the price at which you can exercise the option)
- Expiration date (the last trading day to exercise your option)
Types of Options
There are two primary classes of options:
- Call: Buying options allow you to purchase a security at a specific price.
- Put: Selling options allow you to sell a security at a specific price.
American v. European Options
American options can be exercised at any time between the date of purchase and the expiration date. European options can only be exercised at the end of their lives on their expiration date.
The distinction between American options and European options has nothing to do with geography. It only has to do with the exercise of the options. Many options on stock indexes are of the European type.
Because the right to exercise early has some value, an American option typically carries a higher premium than an otherwise identical European option.
This is because the early exercise feature of an American option is desirable and commands a premium.
Why Trade Options As Compared to Common Stocks?
Day trading with options on the stock market appeals to many day traders for several reasons, including the key points below:
- Low Cost – Day trading in options allows a trader to enter and exit the stock market fast and with less risk than other securities, such as stocks and mutual funds. It is significantly cheaper to purchase an option contract than to buy the underlying asset (e.g., a share of stock in Tesla, or Apple). In essence, the day trader is controlling the same number of shares with less capital.
- Larger Upside Than Trading Stocks – When a stock produce rises or falls, the day trader can gain more with an option.
- Diversification – Because options contracts are cheaper than buying the actual stock, the trader benefits from more investment opportunities. The day trader’s capital goes farther, increasing his or hers profit potential.
- Market Volatility Is Not as Much a Concern – Volatility itself can be profitable. A day trader can profit whether the stock goes up or down.
- Mutually beneficial– Although options are often built on stocks, combine both and they can bring you greater benefits. This is because you can sell your option to create income on the stocks you already own.
Intraday options trading in the stock market gives the day trader an opportunity for significant profit potential. A key aspect that makes options trading worth considering is the access to the market. A day trader can start day trading from anywhere in the world (as discussed above, regarding office space and equipment.)
One other key component of a successful options day trader is having a good broker, trading platform and mentor (who provides a solid trading strategy, specific technical analysis of the market, and understands the risk involved in options trading), and these topics are discussed further below.
Potential Downsides to Day Trading Options
Despite the numerous benefits, there are obvious potential downsides that come with trading in options. The following provides some key areas to be aware of:
First, like other securities including stocks, bonds and mutual funds, options carry no guarantees. Be aware that it’s possible to lose the entire principal invested, and sometimes more.
As an options holder, you risk the entire amount of the premium you pay. But as an options writer, you take on a much higher level of risk. For example, if you write an uncovered call, you face unlimited potential loss, since there is no cap on how high a stock price can rise.
As such, you must become very well versed in the basic strategies associated with options trading before making any real trades. For example, you do not need to learn options trading using your own capital. Rather, you can “practice” day trading options offered on platforms by various online brokers.
Second, because initial options investments usually require less capital than equivalent stock positions, your potential cash losses as an options investor are usually smaller than if you’d bought the underlying stock or sold the stock short. The exception to this general rule occurs when you use options to provide leverage. Percentage returns are often high, but percentage losses can be high as well.
As always, individual investors must manage their own options strategies, including when to execute trades, what minimal risk are they comfortable with and other risk management considerations.
However, neither of the above downsides (among others) should not prevent one from day trading options. If you take both considerations into account, the trader can develop his day trades accordingly. Successful traders know the risks, and plan for such risks prior to day trading options.
A Good Broker And Platform Is Critical for Day Trading Options
Day traders that are specifically looking into day trading options, choosing the best options trading platform is critical. Most major brokers have options trading capabilities, but not all of them offer platforms geared specifically for options trading.
As with the selection of any professional service, independent research is the best way to identify a company that offers specific services you need. For example, one trading platform may be more suitable for pattern day trading, while another platform is more suitable traders with less intense trading strategies, including those who just want generic financial news.
The following is a list of some of the top options trading companies:
- Charles Schwab
- TD Ameritrade
- Axos Self-Directed Trading
- Trade Station, and
- Options AI
There are, of course, others, but this is a good starting point when doing your research on identifying a brokerage account and broker that meets your needs.
You also must consider the actual trading platform that each broker company offers. For example, TD Ameritrade offers the thinkorswim trading platform. The thinkorswim platform provides state-of-the art technology for options trading, including the ability to maintain a cash account, excellent charting capabilities, same day trades, real time access to the options market, among many other financial instruments specifically designed for options trading.
Find a Good Mentor for Day Trading Options
Before venturing into day trading options, it is incredibly important to identify a mentor that has the experience and expertise to guide you in the learning phase. Even an experienced pattern day trader in stocks should have such mentorship, because trading options presents several new types of issues and concerns. There are terms and phrases that don’t apply to trading in stocks, such as “at the money,” “strike prices,” and “option pricing,” among many other unique terms.
The mentor can help guide the day trader on the amount of financial risk you are willing to take, something that a brokerage firm may not be as helpful with.
This mentor will usually be someone who has spent many business days working in the stock market and has become aware of effective options strategies, including a detailed technical analysis of conducting day trades. In other words, you own business insider for the financial markets.
Conclusion: Day Trading Options
As with any profession, if you want to learn about options day trading, you must conduct a significant amount of research before you embark on making any actual trades using your own money. The information above is intended to provide a general background about day trading options. The difference between winning trades in the market and consistently losing money is having a solid trading plan in place.
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.”