Swing Trading Options Process

Swing trading options is a great trading technique for beginners and advanced traders alike. Some of the most common ways to swing trade options are naked calls and puts, credit spreads, and debit spreads. Traders look to buy a weekly contract for shorter term swings and monthly expirations when trading a few weeks to a couple months out. Naked calls and puts are a directional strategy. So, you need the stock to move in your direction of your contract quickly to see a profit. The basics are simple. Purchase a call when price rises and puts when price falls. Check out the video below that breaks down the details!

Can You Swing Trade Options?

There are many traders that like to swing trade options. It’s a very popular trading strategy. It involves buying and selling monthly contracts one to two months out, typically, but each trader will decide if they need to buy shorter or longer term options contracts depending on their particular style and strategy. Most traders are keeping it simple, they either do naked options or trade them with debit or credit spreads.

Swing Trading Options Strategies: How to Swing Trade Options

  • When swing trading options, it’s important to determine the overall trend of the stock. Never trade against it
  • Map out support and resistance levels
  • Look for candlestick break out and break down patterns
  • Look for news catalysts
  • Swing trade options that are highly liquid with high open interest
  • Choose strike prices with a tight bid/ask spread
  • Give yourself enough time until expiration. Spreads are higher probability of success trades but less profit
  • If the setup looks good then look for a good intraday entry
  • Have your entries and exits mapped out prior to taking a trade
  • Keep your losses small and let your runners run to your targets

Intraday Trading Vs Swing Trading

Put Debit Spreads

Day trading is when you hold for less than a day whereas with swing trading you usually hold the option from at least overnight to as many days as it takes to hit your resistance zone (profit zone).

Sometimes it takes a little longer than you want and you must sell before option decay sets in. You lose too much time value. So swing trading a naked call or put creates a race against time. Every day that the option trades sideways is a day that you lose a little of the contracts value. When you get closer to the day of expiration (date the option contract dies) the time value drops faster and faster, thus, the option “decays” more quickly.

A lot of folks swing trade options because of the PDT rule. The PDT (pattern day trader) rule is lets you buy and sell a stock in the same day only 3 times in 5 business days. You have to have an account of $25,000 or more to not fall under this rule, which isn’t always easy for new traders who are just starting out.

If you’re subject to the PDT rule then swing trading options is going to be incredibly helpful in getting around that.

Right But Not Obligation

Options gives you the right but not the obligation to buy or sell an asset at an agreed on price in a certain amount of time. Most options traders just want to trade the options, they don’t really want to own the stock. It’s just a game of hot potato. Swing trading options is a short term strategy.

Now, most traders are not going to get too comfortable with sitting in the trade a long time. Usually, options traders have an expectation to make a profit within 3 to 5 days of purchasing the option. Swing trading usually plays on the short term price action. It can be affected by earnings, news and rumors. The longer you are in the trade, the riskier it gets. Plan your entry accordingly.

The nice thing about swing trading options is it lets you make a trade with less capital and more leverage. You’re holding the premium for the right to buy 100 shares instead of paying the price for 100 shares.

Buying options with an expiration date that is a couple weeks out and deeper in the money is one of the more beneficial ways to make money because there is intrinsic value in the contract. Meaning, if I bought a 30 dollar call on $NIO, and the stock is trading at 40.00 – I have 10.00 of “intrinsic value“. There is also more time value if I purchase a few extra weeks out.

Investors are usually willing to pay a higher premium price for an expiration that is further out. It’s just “safer” and gives more breathing room for the trade to work out.

Just like in real life, time allows time to reach your goals. To learn more about options take our options course.

Swing Trading Options
Monitor your call or put option by looking at the chart of the option. Looking at the stock chart is not enough for most options traders. If you’ve never seen a call or put chart, ask yourself why!? Then make sure you get a platform that shows the candlestick chart of an option.

Is Swinging Options Less Risky?

One “call” options contract gives you control of 100 shares at price that is far lower than purchasing the actual shares. For example, if a stock is trading at $246 and you choose an option with an expiration date that’s a week out, the strike price would be about $4.15. So $4.15 x 100 would be $415 dollars that you’d be risking. So, if you’re looking at it from the perspective of capital risk, yeah, it’s less risk than owning 100 shares.

Whereas purchasing 100 shares of a stock at $246 would be $24,600. So you can see how you’d be risking less capital by swing trading weekly options.

You’ll never lose more than the cost of purchasing the option but you can lose it. So while there is never a 100% risk free way to trade, swing trading options is a way to define your risk and limit it.

Because you’re risking $415 as opposed to $24,600 you’ll have more money to make more trades. You’ll be able to diversify which, in turn, also allows for less risk. Managing risk is one of the most important aspects of investing and trading. Make sure you watch our video on risk management here.

How Much Money Do You Need to Be a Swing Trader?

There isn’t a specific amount that you need to be a swing trader but having at least $5,000 to $10,000 in an account is a good target amount. The more money the more leverage that you have to trade. This also prevents having to put too much capital into one trade. If you’re going to trade credit spreads the more money the better due to margin requirements per trade.

What Is the Safest Option Strategy?

Credit spreads are the safest options strategy. Options sellers have much better win rates than options buyers. If you’re looking to be an options buyer then debit spreads are a safer option strategy than buying naked calls and puts. The bottom line is, straight long call or long put aka naked options are more risky and have less of a chance of being profitable.

How To Swing Trading Options With Technicals

Swing Trading Options

You probably hear people say “know your technicals”  often when you’re getting into trading. People saying this may sound like a broken record. If you want to know the most profitable option trading strategy then knowing the technical indicators would be the best place to start. And you might need more than an Iphone to get started, you’re going to need a good platform that works on a computer as well.

It all boils down to this. You need to get a good entry and exit. Getting a good entry allows you to stomach the pull back as a stock travels along in its trend. A good entry is going to determine the profits you make.

Knowing support and resistance is incredibly important. The indicators are going to help you find that. That is going to be the difference between profit and loss. Swing trading options is a great way to make money once you know the direction that a stock is potentially going to move.

If you believe a stock is going to go up and you buy a call without looking for support and resistance, you could be buying that call at resistance. If you do that and it can’t break that resistance and falls, you’re going to lose. If it hits the resistance and falls, and you didn’t know where that was, you’ll be giving profits back. If you want want to learn more about technical analysis take our. We teach about swing trading and options live in our trade rooms. Check out our to learn more.

What Is the Best Swing Trading Strategy?

  • Buying naked options are the most profitable buying strategy, but you really need to know what you are doing
  • Selling naked options is the most profitable options strategy overall but also most risky
  • Debit spreads are a great directional strategy that helps to manage risk
  • Credit spreads are the safest and least directional strategy
  • Iron condors are the best range bound strategy

Here’s a stock chart on $NFLX laying out simple supply and demand zones. Experienced options traders will review these zones and look for opportunities to trade.

Buy Low Sell High. It’s That Easy?

Keeping things simple is key with trading. Many traders will try to over complicate things but it does come down to one simple phrase. Buy low and sell high. That is why support and resistance are so important. If you buy a stock at support and it starts to go, make sure you know where the resistance is. That could be the difference between a $500 profit or a $1,000 profit.

Can You Trade Options With a Small Account?

Yes. A lot of people start swinging options with small accounts, with less than 1,000 bucks in them. If you are patient, you can grow a small account overtime. Credits spreads are one of the best and safest ways to trade options and grow a small account. The gains will be smaller, however, it takes patience and proper risk management to grow a small account trading options. Day trading options limits you to the PDT rule and requires $25,000 to allow unlimited trading.

Don’t Be Greedy

When you’re swing trading options and you log in to see your gains, it’s always a great feeling to see green. When you see that number rising you just want to let it run and run. However, be mindful of supply and demand zones. Spot reversal zones BEFORE they happen, so you do not give back too much profit. Lots of traders will sell some on the rise up, and lock in profits, and only hold a few contracts into the final resistance zone. This tends to go better than buying or selling all of your contracts at once.

You always want to cut your losses quickly and let your runners run. But you need to make sure you’re paying attention to what the technicals are telling you instead of what your emotions are. Play the trend and follow the trend lines. Make sure to practice paper trading options.

When you get greedy and don’t take that profit you can watch your gains go from green to red in a jiffy. You never go broke taking a profit. 

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