Swing trading options are a great trading technique for beginners and advanced traders alike. 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 of months out. Naked calls and puts are a directional strategy. So, you need the stock to move in the direction of your contract quickly to see a profit. The basics are simple. Purchase a call when the price rises and puts when the price falls.
Swing Trade Options Explained
Many traders like to swing trade options. It’s a very popular trading strategy. Typically, it involves buying and selling monthly contracts one to two months out. Still, each trader will decide whether to buy shorter or longer-term options contracts depending on their particular style and strategy. Most traders keep it simple; they do naked options or trade them with debit or credit 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. Then, you need more time value. So swing trading a naked call or put creates a race against time. Every day, the option trades sideways, and you lose a little of the contract’s value. When you get closer to the expiration date (the 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 lets you buy and sell a stock only three times in 5 business days on the same day. You must have an account of $25,000 or more to avoid falling under this rule, which can be challenging for new traders just starting.
If you’re subject to the PDT rule, swing trading options will be incredibly helpful in getting around that.
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Right But Not Obligation
Options give you the right but not the obligation to buy or sell an asset at an agreed price in a certain amount of time. Most options traders want to trade the options. They don’t want to own the stock. It’s just a game of hot potato. Swing trading options is a short-term strategy.
Now, most traders will only be comfortable sitting in the trade briefly. Usually, options traders expect 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 that they let you 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.
Swing Trading Options ITM
Buying options with an expiration date that is a couple of 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. For example, if I bought a $30 call on $NIO, and the stock trades at 40.00 – I have 10.00 of “intrinsic value.” There is also more time value if I purchase a few extra weeks.
Investors are usually willing to pay a higher premium price for a further-out expiration. 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.
You can monitor your call or put in an 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, ensure you get a platform that shows the candlestick chart of an option.
Is Swing Trading Options Less Risky?
One “call” options contract gives you control of 100 shares at a lower price than purchasing the actual shares. So, for example, if a stock is trading at $246 and you choose an option with an expiration date a week out, the strike price would be about $4.15. So $4.15 x 100 would be $415 that you’d risk. So, if you’re looking at it from the perspective of capital risk, it’s less risky than owning 100 shares.
Whereas purchasing 100 shares of a stock at $246 would be $24,600. So you can see how you’d risk 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 are a way to define your risk and limit it.
You’ll have more money to make more trades because you’re risking $415 instead of $24,600. As a result, 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.
You probably hear people say, “Know your technicals” often when you’re getting into trading. People saying this may sound like a broken record. However, knowing the technical indicators would be the best place to start if you want to know the most profitable option trading strategy. And you might need more than an iPhone to get started. You’ll also need a good platform that works on a computer.
It all boils down to this. First, it would help if you got a good entry and exit. Getting a good entry allows you to stomach the pullback as a stock travels 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 are a great way to make money once you know the direction a stock will potentially move.
If you believe a stock will go up and you buy a call without looking for support and resistance, you could buy that call at resistance. But, of course, you will lose if you do that, and it can’t break that resistance and falls. If it hits the resistance and falls, and you didn’t know where that was, you’ll give profits back.
Buy Low, Sell High. Is it That Easy?
Keeping things simple is key with trading. Many traders will try to overcomplicate 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, ensure you know where the resistance is. That could be the difference between a $500 or $1,000 profit.
Don't Be Greedy When Swing Trading Options
When you swing trading options and log in to see your gains, seeing green is always great. When you see that number rising, you 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. Many traders will sell some on the rise up, lock in profits, and only hold a few contracts into the final resistance zone. This tends to go better than buying or selling all your contracts simultaneously.
You always want to cut your losses quickly and let your runners run. But you need to pay attention to what the technicals tell you instead of your emotions. Play the trend and follow the trend lines. Make sure to practice paper trading options.
You can instantly watch your gains go from green to red when you get greedy, and don’t take that profit. You never go broke taking a profit.
If you need more help, take our options trading course.
Frequently Asked Questions
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.
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.
- 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
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.