How to Day Trade Options Strangles
Do you know how to day trade options strangles? Option strangles are a great way to break into day trading options. Are you getting really good at day trading penny stocks but you find yourself wanting to day trade large caps and ETFs? I have been there too but my working capital was a bit lacking. I wanted to aggressively grow a small account but I just couldn’t take a meaningful position in large-cap stocks that would accommodate a favorable risk to reward ratio. Then I ventured into options trading.
Are Option Strangles Profitable?
Getting into options trading can be terrifying with a small account. What if I told you about a way to day trade options while only risking around $80 but with a really high chance of profit? First, let’s get a few details worked out.
You don’t need to be afraid of options. It just takes a little time and study to learn the ins and outs of options trading.
Open a Commission-Free Cash Account:
PDT rules do not apply to most cash accounts. However, a few commission-free brokers do not allow options trading in a cash account. Robinhood in particular does not allow options trading in a cash account. I use Webull but there are a few others out there too.
A little knowledge about settled funds in a cash account. Funds from trading shares of an equity generally settle in your account after 2 business days or T+2. For example: selling a position on Monday will settle on Thursday morning.
This is where options trading really shines. Funds from options trading are settled overnight! In a cash account, you can day trade options every single day on your settled funds!
A word about settled funds. You should only day trade with the settled funds available in your cash account. Trading with unsettled funds will result in a GFV or Good Faith Violation. You can get away with it once in a while.
However, you should know that if you commit 3 GFV within a 12 month period you will likely incur account restrictions. I only ever do this in an emergency to avoid loss.
What Is the Options Strangle Strategy?
Let’s talk about how to day trade options strangles. An options strangle is a neutral position where you buy both an out of the money call option and an out of the money put option with the same expiration date. Ideally, each option will cost about the same amount of premium to open.
Why on earth would you want to day trade a neutral position?
A neutral position is ideal if you are not 100% sure of the likely direction of a price action move on a particular trade setup or chart pattern but you know that it will move. Also, a neutral position is a great way to reduce risk if a trading plan begins to move against you. This will greatly calm your nerves if you are new to day trading options and it will also give you a much higher chance of profit when traded properly.
What Setup Is Best for a Strangle Entry?
While reversal patterns are pretty good for strangle entries, wedges or bear flags and bull flags AKA continuation patterns are best. Here’s why. Two reasons actually, firstly you can take advantage of 1-minute candles within a wedge to leg into your strangle with a small cushion of profit between them. Secondly, you can react quickly to a flag breakout more readily than you can while waiting for reversal confirmation.
What options strike do we buy? You can keep it really simple and I like simple. One can take a few extra seconds to analyze dollar shift in order to choose the right strikes but time is precious. Sometimes you will only have a few seconds to get this right.
Using SPY as an example I simply flip open the options chain anywhere between 2 to 5 days to expiration and look for premium between $0.38 to $0.42 and focus on timing my legging in. One strangle position should only have an outlay of around $80.
The above also works well for QQQ but not much else. Each equity will have a different options flow and one strike premium price range will not work for everything.
How and When Can You Take Profit From a Neutral Position?
Since far out of the money options tend to have relatively low Delta and Delta will advance more rapidly than decline relatively to price action when far out of the money, we have a great advantage. With only a couple to a few days to expiration, time decay will affect this position. Though you can also swing trade a strangle position with 30+DTE, we are only interested in holding our position for less than 15 minutes.
There are two ways to get Shwifty here. If the flag breakout has really good momentum, the Delta skew will add profit to the position. I.E., the losing leg will decline in value much less than the winning leg will appreciate in value. If the breakout trend ends abruptly you may not have time to leg out of your position.
In this case, you can simply close the entire position to take a decent profit.
This Is Sparta
Now for the second and ideal way to close the position for a substantial profit. If you find that the momentum in the breakout is strong and likely to continue, you can really clean up.
All you need to do is sacrifice the losing leg and let the winner prosper unburdened by the loser until the trend is exhausted.
I will generally sacrifice the loser when the loss is about 10%. When I demonstrated this strategy during a Livestream I was able to take a 127% gain less the 10% loss in just 8 minutes. That’s 117% in 8 minutes!
How’s that for an options strategy that the average beginner options trader can trade? So make sure you know how to day trade options strangles.
The more strategies you know, the more trades you can take. However, make sure you don’t try to learn so much you can’t perfect the styles that work best for you.
Sometimes a somewhat dark sense of humor can bring a delightful flair to the otherwise drab process of explaining complex things to an audience. It also makes the complex knowledge entrained within the delightful banter much more memorable… Author Unknown.
You may have heard about the history of Sparta wherein the populous would sacrifice the weak in favor of the strong. Anyway, during our Livestream sessions, we engage our community members with light-hearted conversations about trading strategies and humor often ensues. Although knowing how to day trade options strangles is nothing new, the way we trade them is a bit unique with legging into and out of the position.
During my explanation, I used the word “sacrifice” instead of the word “close” when closing the losing leg of the position. A little back and forth hijinx later we arrived at a decision to aptly name our somewhat unique strategy. Henceforth we shall refer to this strategy as “The Spartan Strategy”.