Day Trading Options


Can You Day Trade Options ?

The answer is, yes and no. First of all options fall into the day trading “Pattern trader” rules so you need to have $25,000 in your account to not trigger the day trading restrictions. (That is one of the reasons why many small investors use futures for day trading as futures aren’t part of the day trading rules).

If you decide to day trade options then you really need to base you strategy risk/reward off of the price of the underlying stock of the options you are trading and not on the movement of the options price. Meaning, evaluate your risk/reward based on stock price and not option premium prices so if the stock breaks support then that triggers your stop loss.

There are many ways to trade options short term and it best to stick to a system or criteria you apply for every trade. Otherwise if you are trying to use multiple strategies with various risk/reward setups then it can be hard to  achieve good results. Apply the same position sizing and risk for each trade so no one trade hurts your account too much.

Day Trading Options Strategies

Most options day trading strategies are based off of technical analysis. There are a few strategies that traders will make day trades off of volatility or movement in greeks without a focus on technical analysis.

A couple common criteria for the type of option you buy when day trading is to pay attention to the delta of the options you buy and the volatility priced in.

  • If you buy an option with low delta(such as at the money or out of the money options) then they might not move enough to offset any time decay). For day trading take advantage of deep in the money weekly options because you will pay less for time value.
  • Pay attention to volatility in the options you buy because if you buy during a period with abnormally high volatility like after a big price gap down or pre-earnings then you could end up overpaying for the options and risk having the option premium drop quickly if volatility drops. Generally you want to be a seller of high volatility and buyer of low volatility.

Directional Options Day Trading

Many traders will now use weekly options for short term day trading as you are paying time premium in the options. Various strategies if you are bullish would use an options with at least .70 delta so that your long options gets good movement with the stock.

The best directional strategies for day trading options are ones that have the highest likelihood for quick moves. These moves usually occur at breakouts or at specific retracement levels. Some example strategies:

  • Trade based on fibonacci retracements on short term charts. You can use fibonacci retracement levels as good risk/reward levels either selling credit spread at these levels or buying in the money options to play a bounce at these levels. Generally it is best to find fibonacci levels that overlap at multiple timeframes and correspond with the recent trend of the stock. You can also use candlestick price patterns to confirm a buy at those fibonacci levels. Read the past post about fibonacci trading.
  • Overbought/oversold indicators in trendless or range-bound stocks. You can sell credit spreads or buy in the money options at those defined support/resistance levels with close stops. Realize that stock might not move quick enough off these levels so pay attention to prior price action to get an idea of estimated moves at these levels.
  • Breakout indicators on short term charts like Williams r% on an hourly chart work well.
  • Indicators that signal unusual low volatility periods like bollinger bands, keltner channels, or combined indicators like John Carters TTM Squeeze indicator will work well to place trade prior to big moves.

Using Greeks to Daytrade Options

With the use weekly options there are now more opportunities to trade short term options with rapid time decay. Some example strategies:

  • Trading volatility where you sell options with high volatility like out of the money credit spreads with anticipation of a drop in volatility. This is a popular strategy around earnings season or on a stock that has a big price gap. The front month options(or weeklies) will have an unusually high volatility that allows you to generate good risk/reward as an option seller. A popular earnings strategy involving volatility is selling an iron condor based on strike prices of the expected earnings move. Right before earnings you look up the premiums of buying an at the money call and put to get an idea of what the market makers are expecting for an earnings move and then that gives you an idea of how far out to sell the put credit spread and call credit spread(creating an Iron Condor). If the stop gap up or down after earnings by less than the expected range then you keep the premiums. You are essentially trading like a market maker using probabilities with this strategy.
  • A more advanced strategy using options greeks is trading gamma near expiration intraday.

Trader Tip – Before trading any options on a short term basis, make sure you papertrade all strategies especially day trading to make sure you get a feel for how an option moves in relation to the underlying stock. Many brokerages offer free papertrade accounts and some allow real back testing. Pay attention to volatility, delta, and theta when evaluating which options to trade with.

If you have any options day trading strategies that work for you, please share in the comments below.

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