Day trading options for income are a very popular strategy. This is where traders buy and sell weekly options contracts. They wait for the right setup and capitalize on the short-term momentum of a stock.
Day trading options involve 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 for a week or two until expiration and buy either at the money or one strike in the money. Many times they will buy same-day expiration because they are cheaper.
Options trading…Oh man, what a fun subject! This type of trading is one way to make money in the stock market that might fit your style.
It’s important to day trade options with high volume and liquidity, tight spreads, and high open interest. If they don’t have that criterion, moving on is important. ATR (Average True Range) is also helpful to review before taking the trade.
Breakdown
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.
We 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 options strategies that we day trade regularly. They are “naked” calls and puts. You purchase a call if you believe the stock will go up and purchase 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. These are good for day trading.
The “naked” part means you don’t have any shares of the stock when you buy the call or put and that 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.
We like to keep an eye on the following:
- Breakout stocks mean a daily breakout or range breakout
- The open interest, which means there are plenty of people who have traded these contracts
- Options alerts from either Benzinga or QuantData show large option sweeps.
Here we see some unusual options sweeps that we can potentially day trade.
Choosing the Right Strike Price
When using day trading options strategies, you must pick a strike price and expiration date to put 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 mean that is necessarily 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 a chart like 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 for 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, that means that 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. Take our day trading course if you need more information on drawing trend lines or finding support and resistance.
Volatility and Options Trading During the Day
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 differ from day trading stock 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, as the call chart of $FB shows above.
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.
ATR Is Important!
A couple of higher-priced stocks check out each day because I know they usually move at least $5 or more daily. One of the risks of a higher-priced stock is that the strike price is higher than a smaller-priced stock.
You must be willing to put up the money and be OK with losing that amount. 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.
Here we have a list of current high-volume options being traded. These stocks have many “open interest” in options and are highly liquid, making them easy to trade and in demand. They also had a tight bid-ask ratio.
Once you’ve hit the limit of trades you can make because of the PDT rule – you’re done for the week – if you are a margin account. However, you are in a cash account, you can day trade, every day, over and over, 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 is options until you run out of buying power. Then you can do the same again the next day.
Set Your Goals
Day trading options can be pretty profitable in a short period. So it’s even something you can do for income.
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 goals will help you discover what you need to do to achieve these goals and what mistakes you make that hurt your success. There needs to be a consistent flow of money, so when things go wrong, pick apart why things went wrong!
You’ll have days where you win and even win big. And days where 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.
Trading Market Open
We have found that stocks are usually the most volatile at the 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.
This is because you have a higher probability of success trading credit spreads over naked options. After all, being an options seller puts the trading odds in your favor. So, you’ll receive less premium the more you build higher probability trades.
Debit spreads also can net you solid gains. They are between buying naked calls and puts and selling credit spreads. They are a buying strategy combining buying and selling calls or puts. The selling portion of the debit spread helps to lower the break-even level, thus lowering your overall risk in the trade.
If you need more help, take our options trading course.
Frequently Asked Questions
Day trading options can be a very profitable trading strategy, especially when trading weekly expiration options. Many traders buy weekly options with 1-2 week expiration's, either at the money or 1 strike in the money, and then sell them for profit. Effectively "scalping" their way to consistent gains. These traders are trading the price action, Getting in and jumping out. Easier said than done though!
Depending on the price action these large cap stocks such as $AAPL, $ROKU $AMD, $NVDA, $BYND, $NFLX, $CRON, $CGC, $UBER, $FB, $BABA, $GE, $AMZN, $NIO $MU, $MSFT to name a few.
- Highly liquid - they should have millions of shares traded on average a day
- Tight bid/ask spread
- Is the spread on options more than 5 bucks? If so look elsewhere
- High open interest with volume if you're day trading options
- Weekly options with 1-2 week expiration's.
- High open interest is 1000+ and I prefer to see at least 100 volume on the day.
- More is always better in this case
- Look for news catalysts like earnings or economic reports daily breakouts and key support or resistance levels
- Have at least $5,000 to $10,000 in a brokerage account, ideally
- Buy a short term weekly options contract with less than 2 weeks expiration
- Make sure the options the contract is is affordable and doesn'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
- That will be $100 profit a day trading options if executed properly
