Day trading options is a very popular trading strategy. Day traders wait for the right setup and capitalize on the short-term momentum of a stock. It involves buying short-term weekly options contracts and then selling them within the same day, many times, within seconds up to a few minutes. Traders typically buy contracts with a week or two until expiration and buy either at the money or one strike in the money. Many times, they will buy the same-day expiration because they are cheaper.
Keep an eye on the following:
- Breakout Stocks: Look for stocks with a daily chart or range breakout.
- Open Interest: Trade liquid options contracts with high open interest.
- Options Alerts: Use tools like Benzinga or QuantData to show large option sweeps.
What Is Day Trading Options? (Explained)
It’s important to day trade options with high volume and liquidity, tight spreads, ATR (Average True Range), and high open interest. If they don’t have that criterion, moving on from taking a trade is important.
When you purchase an option, you have the right but not the obligation to buy or sell the security at a specific strike price (stock price). This means you can buy one hundred shares of the stock on which you bought the options contract. Options contracts expire, so you can’t hold them forever.
Day traders don’t care about that stuff because we are just flipping them like a game of hot potato. Or like a game of musical chairs. You’ll be able to understand the analogy here shortly.
There are two types of option strategies that we day trade regularly. The first strategy is trading “naked” calls and puts. You purchase a call if you believe the stock will go up and a put if you believe the stock will go down. You profit when the stock price moves in the direction of your call or put.
The “naked” part means you don’t have any shares of the stock when you buy the call or put, and you’re just buying a call or put contract. So you’re just jumping in and trading the contract like you would a share of any stock.
Choosing the Right Strike Price
When using day trading options strategies, it’s important to pick a strike price and expiration date that puts you in a profit zone when the stock moves.
The expiration date closest to the calendar day of the month you are trading on is usually cheaper than choosing one that is a week or two out. However, that doesn’t necessarily mean that is the expiration date you should be trading.
You’ll also need to choose whether to be in or out of the money. To help you trade calls and puts, you can use an options chart, such as one from Interactive Brokers or ThinkorSwim.
Most brokers have a call-and-put chart showing you what the option is doing on a candlestick chart. These are great platforms to practice paper trading options.
ITM Options Trading
Being in the money means a call option’s strike price is below the market price. If you are in the money for a put option, the strike price is above the market price.
Being out of the money means the call option strike price is above the market price, and the put option is below the market price. Picking a strike for day trading is important; more on that below.
The first thing you need to do when day trading options is to find the day’s trend, as well as support and resistance.
The trend is your friend. And the trend you see will determine the option you choose. It also helps you to determine the strike price you want that day. Support and resistance are incredibly important.
Buy at support and sell at resistance if you’re buying a call. Buy at resistance and sell at support if you’re buying a put.
Set Your Goals
Day trading options can be a profitable intraday trading strategy. First, you should set a goal for what you want to make that week or month. Next, practice in a simulated account before using your real money.
Writing down your trading goals will help you discover what you need to do to achieve these goals and what mistakes you make that cause losing trades.
You’ll have days where you win and even win big. And days when you lose. Cutting your losses quickly helps to minimize any damage to your brokerage account. A rule of thumb is always to protect your capital! Trade defensively.
Day Trading Options Volatility
Another thing we recommend when learning how to day trade options for income is picking a volatile stock. You want a stock that is moving, not trading sideways.
Day trading options differs from day trading stocks because options can decay in price quickly. This is because options are a decaying asset due to the time value function of the option (theta).
A stock can profit even if it moves ten or twenty cents. With options, the more the stock moves “in the money” or into the money, the more money you will make.
The more expensive the stock, usually, the more of a range it has, providing options traders with more opportunity. That’s because it’s moving dollars a day rather than pennies.
That’s not to say that a lower-priced stock isn’t going to turn a profit, but you would most likely need to purchase more options contracts for it to do so.
Here is a list of high-volume options. These stocks had high open interest and were liquid, making them easy to trade and in demand. They also had a tight bid-ask ratio.
ATR Is Important!
We prefer to trade options on stocks with an ATR (true average range) of 3 or more, and using a scanning tool is a great way to find them.
Once you’ve hit the trade limit you can make because of the PDT rule, you’re done for the week if you have a margin account (3-day trades in 5 calendar days). However, if you are in a cash account, you can trade daily until you run out of cash.
Then your cash settles overnight (T-1), and you can do it again, 5 days a week. So if you have 5k in an account, you can trade with 5k if all you trade are options until you run out of buying power. Then you can do the same again the next day.
Best Stocks to Day Trade Options
Here are some good stocks to day trade options:
- $AAPL
- $ROKU
- $AMD
- $NVDA
- $BYND
- $NFLX
- $META
- $BABA
- $AMZN
- $MSFT
Day Trading Options Criteria
Here are some important criteria for day trading options:
- Search for highly liquid stocks with millions of shares traded daily on average.
- Tight Bid/Ask Spread. If the spread on options is more than five dollars, don’t trade it.
- High open interest (1,000+) with volume.
- Weekly options with 1-2 week expirations.
- Look for news catalysts like earnings, economic reports, and daily chart breakouts.
Trading the Market Open
We have found that stocks are usually the most volatile at the market open. But wait to jump in a few minutes before you do. First, they need to establish their momentum and direction. So many times, we’ve jumped into a stock initially because it looked like it was going one way, only to reverse and go the opposite way for the rest of the day.
If it’s one of those volatile stocks, you can usually jump in and out all day if you don’t have that pesky PDT rule.
Or you can, and this is our favorite way to do it: wait for it to find its direction, get in, and ride it out until you think it can’t keep going. Then, draw your channels and trend lines to find when to take a profit. As always, use proper risk management strategies when day trading options.
Frequently Asked Questions
How much money do you need to day trade options? If you do not have an account of $25,000, you are subject to the Pattern Day Trading (PDT) rule. You are allowed three same-day trades in a five-business-day period with a margin account below 25k. Cash accounts allow you to day trade the amount of money you have in the account daily.
Day trading options can be very profitable, especially when trading weekly expiration options. Many traders buy weekly options with 1-2 week expirations, either at the money or one strike in the money, and then sell them for profit. Effectively "scalping" their way to consistent gains.
Successful traders can make up to 50% or more per options contract on winning trades. That could translate into $500-$1,000 or more per trade. Profitability is higher when trading naked options, but it carries more risk. Credit spreads can also net you 50% or more gains, but the payout isn't as large.
- Have at least $5,000 to $10,000 in a brokerage account
- Buy a short-term weekly options contract with less than 2 weeks' expiration
- Make sure the options in the contract are affordable and don't risk more than 2% of your account
- Close out the trade when you are at your percent of profit, or when you're target is hit
Investors need at least $25,000 in a margin account to day trade options to avoid being flagged as a pattern day trader. Otherwise, they can only make 3-day trades within five calendar days.
