Day Trading Options
Day trading options for income is a very popular strategy. This is where traders buy and sell weekly options contracts. They wait for the right set up and capitalize on the short term momentum of a stock.
Table of Contents
What Is Day Trading Options?
- Day trading options involves buying short term weekly options contracts then selling them within the same day. Many of 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 of 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 criteria then it’s important to move on. ATR (Average True Range) is also very helpful to review prior to taking the trade.
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 have the right to buy one hundred shares of the stock you bought the options contract on. Options contracts expire so you can’t hold them forever.
We don’t care about that stuff though, because we are just flipping them like a game of hot potato. Or like a game of musical chairs. You’ll 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 is going to go up and purchase a put if you believe the stock is going to 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 that you’re just buying a call contract or a put contract. You’re just jumping in and trading the contract like you would a share of any stock.
We like to keep an eye on:
- breakout stocks meaning a daily breakout or range breakout
- open interest which means there are plenty of people who have traded these contracts
- options alerts from either Benzinga or QuantData which show large option sweeps.
Choosing the Right Strike Price
When using day trading options strategies you need to pick a strike price and expiration date that will put you in a profit zone when the stock moves.
The expiration date that is closest to the calendar day of the month you are trading on is usually going to be 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 chose whether you want 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 which will show you what the option is doing on a candlestick chart. These are great platforms to practice on for paper trading options. Take a look at the Facebook ($FB) call chart below.
ITM Options Trading
Being in the money means that 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 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 trend for the day. As well as support and resistance.
The trend is your friend. And the trend that you see is going to determine the option you chose 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. If you need more information on drawing trend lines or finding support and resistance take our day trading course below.
Volatility and Options Trading During the Day
Another thing that we recommend when learning how to day trading options for income is to pick a volatile stock. You want a stock that is moving, not trading sideways.
Day trading options is different versus day trading a stock, because options can decay in price quickly. Options are a decaying asset, due to the time value function of the option (theta).
With a stock, you can profit even if it moves 10 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 its 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!
There are a couple higher priced stocks that check out each day because I know they usually end up moving at least $5 or more a day. One of the risks to a higher priced stock is that the strike price is more expensive than a smaller priced stock.
You have to be willing to put up money and be OK with losing that amount. We prefer to trade options on stocks with an ATR (average true range) of 3 or more and using a scanning tool is a great way to find them.
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 i,f you are in a cash account, you can day trade, every day, over an over, until you run out of cash.
Then your cash settles overnight (T-1), an you can do it all over 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
We’ve found that day trading options can be pretty profitable in a short span of time. It’s even something you can do for income.
First thing you should do is set a goal of what you want to make that week or even month. Next you should 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 along the way that hurt your success. There isn’t going 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 to always protect your capital! Trade defensively.
Trading Market Open
We have found that stocks are usually most volatile at the open. But wait to jump in a few minutes before you do. They need to establish their momentum and direction.
So many times we’ve jumped into a stock at the beginning 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 really volatile stocks then you can usually jump in and out all day if you don’t have that pesky PDT rule to attend to.
Or you can, and this is our favorite way to do it, wait for it to find it’s direction get in and ride it out until you think it can’t keep going. Draw your channels and trend lines to find when to take profit.
The reason for this is because you have a higher probability of success trading credits spreads over naked options because being an options seller puts the trading odds in your favor. So, you’ll receive less in premium the more that you build higher probability trades.
Debit spreads also can net you solid gains. They are the in between of buying naked calls and puts and selling credit spreads. They are a buying strategy that combines the buying and selling of 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!
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 depending on what stocks that you are trading. The profitability is higher when trading naked options, but it also carries with it more risk. Credit spreads can also net you 50% or more in gains, but the payout isn't as large.
- 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
Many new traders wonder how much money they need to day trade options? Day trading options for income follows the same margin rules that stocks do. If you do not have an account of $25,000 you are subject to the Pattern Day Trading (PDT) rule. You are allowed 3 same day trades in a 5 business day span with a margin account below 25k. That's why you want to make sure you pick the right direction the stock is going.