Many folks are wondering if swing trading as a part time job is feasible. It certainly can be if you employ the right strategies. Watch our video below on some of our favorite techniques.
So you have mastered swing trading and you are ready for the next step. You want to turn it into a part time job! What’s the best way to make this happen?
There are several ways to approach this but lets focus on the best ways that we do this. Now mind you, this piece is being written by someone who works a full time job and part time swings.
Benefits are hard to let go of, and many jobs have enough perks where you can balance swing trading and your full time job.
Let’s assume that you can plan your trade by plotting your best entry and exit points with good accuracy and that you know how to take advantage of price action.
For many traders who wish to become part time swing traders the natural next step is options trading. There are a few things to consider first. Options traders know time decay is always working against you.
Also implied volatility swinging from the lows to the highs can make swing trades entries hard to time.
You know enough about options trading to be comfortable trading them, but profitability is hit or miss. What if I told you there is a way to swing trade while taking advantage of time decay and implied volatility swings? All while you work your 9 to 5?
If you have the cash in your account to buy 100 shares of the equity you intend to swing trade you can sell a cash covered put as your entry.
A put option is a contract that is written by the seller. This is giving the buyer the right but not the obligation to sell 100 shares of an equity at a specific price on or before a specific expiration date. The option contract buyer pays a premium to the option contract writer for this privilege. This is great because you can literally get paid to wait for the market to come to you at your planned entry price while also reducing your cost basis.
Here is an example. Let’s say that your plan is to buy XYZ at a target of $48. It is Monday and your analysis has you expecting the price to hit your target by Friday but the current share price is $49.
Looking at the options chain you find that $48.50 puts expiring on Friday are trading at $0.90. If you sold this put and you were to be assigned your cost basis would be $47.60 less any broker fees.
This scenario can go two ways.
If it’s 3:00 pm on Friday and your short put looks like it will expire in the money you can now make a choice. You can let it expire and if it is even one penny in the money at market close you will likely be assigned.
Or you can choose to buy your option back for probably around $0.05, pocket the fruits of time decay and buy your shares anyway. This will save you assignment fees if your broker charges any and still reduce your cost basis.
At this point you have entered your swing trade and you have a solid trade plan to stick to. You have a good idea where your stop loss will be. So let’s say your exit target is $55 for examples sake.
Depending on the time frame of your trade plan you will have a few options. If you’re expecting to exit your position in a week, you’ll likely want to sell your covered call during the first hour of trading on Monday morning.
Implied volatility is usually pretty high for the first hour on a Monday especially if there is a little price action.
Then just sit tight until Friday. If you are planning to be in the trade a little longer you may consider waiting for some daily price action in order to net the most premium.
You can also just ride your trade plan until a couple of days before your exit point and sell an in the money covered call.
If at any point your covered call drops to $0.05 you are almost always better off buying it back to close the position and then sell your shares at your exit target.
The strategy to exit the trade is almost the same as the strategy you used to enter the trade. You want to avoid assignment fees when applicable. So close the trade prior to your expiration date.
If the stock breaks out and blows passed your strike price it is better to just let the assignment happen. But if you are compelled to modify your trade plan, one rule must be applied.
Never close a covered call for a loss. However, you can roll it up a strike or two if necessary; and only if you can at least break even on the premium when closing the original covered call.
After that the exit strategy is still the same. One thing to take into consideration is the fact that your covered call will also act as a stop loss because your cost basis is lower than your entry target.
That doesn’t mean you should risk the profit that you already made. Be sure to keep your stop loss above your cost basis. And be ready to close your covered call and your position should the trade move against you.
The rule is to always protect your capital and profit is part of your capital.
Selling cash covered put options does come with risk. Selling a cash covered put has downside risk from your strike price less the premium received all the way down to $0. So you may want to think twice before using this strategy on volatile penny stocks.
Going long on a position while selling a covered call will cap your upside gain potential to your strike price plus the premium received. Selling a covered call on a dividend stock where the dividend X date is near your expiration date will be susceptible to early assignment.
When the share price plus the expected dividend amount added together are equal to or greater than the strike price plus the premium you are highly likely to be assigned early or before the expiration date.
No big deal, you just will not get the dividend. Time decay or “Theta” is much higher on weekly options and rapidly increases as the expiration date draws near. Typically selling two weeks out will net much more premium than selling one week out.
So, selling cash covered puts is like getting paid to wait for the market to come to you. Selling covered calls is like renting out a piece of prime real estate or beachfront property. I refer to selling options as “pushing premium”.
Just like selling any other depreciating asset the buyer is always at a disadvantage weather the buyer profits from it or not. Think of it as a consumable product that consumes itself.
Short term swing trading options traders must monitor their positions closely and are easily overwhelmed when in multiple positions. It’s harder to some to do their “job” if they are distracted with…life!
We options swing traders have a choice to be the ones selling options rather than buying them. Because of this we have the advantage of being in a much more passive position and can therefore easily be in many positions at a time.
This is extremely beneficial if you are working a job and swing trading. You can check your positions at your leisure and not be in a panic to close them. As long as you are executing your plan and strategy correctly.
When you are swing trading as a part time job its important to implement a strategy correctly so you can focus on your other part time gig, or your full time job. Ideally, you’re not being forced to focus so heavily on it so you can enjoy your life, be successful, and manage your trades.
If you’re looking for more training, look no further, we have daily live webinars, a swing trade alert system through our stock alerts and even free courses to get you on the right path!