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day trading using options

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the term day trading is used when the act of buying and selling a stock within same day is in action. it is considered more profitable by leveraging large amount of money in order to earn profit from little price movements. there are two main problems on the way to day trading which are discussed in this article.

first is the option premium’s time value component has the propensity to reduce the price movement. second, the option market liquidity is less which makes bid-ask spread wider than for stocks. these two options are in your way, if you have plans to day trade and you must learn how to overcome these problems.

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for day trading, the main goal to achieve is using the options with minimum time value and little delta. the point for you is to day trade the near month in-the-money options of stocks with high liquidity. in-the-money options have the minimum time value and largest delta and that is why we day trade in the near-month. in addition to that, near expiry period, the option premium is dependent on intrinsic value. this will impact underlying price changes thus making you aware of every point-to-point movement of the underlying stock. always remember that near month options have got more liquidity as compared to longer term options.

the main advantage of day trading is that it allows you to invest with little amount of money. it is considered as more profitable than buying your own stock. in this case, if somehow the underlying stock price goes down, your loss will be as low as your premium amount.

another option to consider is to plan the daytrade for any specific stock for small upside moves for next few months. in this case, you may buy defensive put options which will avoid any loss in case of stock crash.

daytrading is no doubt a difficult skill and mastering it requires many strategies. as a successful day trader your first goal is to achieve an ideal stock. an ideal stock contains these two qualities: liquidity and volatility. liquidity is like an entry and exit point for a stock at good rate. volatility is the calculation of daily price range and a day trader operates within this range.

if you are done choosing your ideal stock, your next goal is to spot out possible entry points. some tools like intraday candlestick charts and real-time news service are used to identify these entry points. you will also require finding a price target which will mainly depend on your style of trading.

the entry points in day trading are somewhat same as in normal trading but the exit points are different. every year hundreds of traders choose daytrading as their business and dream to earn double and triple profit but reality is different. many of day traders lose their money. well, this is not the case with everyone. if you have chosen the right strategy for your trading, you may earn profit as well. but you need to be extra focused with your every move in order to be a successful day trader.

Read 1109 times Last modified on Thursday, 01 August 2013 10:58
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Contributing Editors

  • adrian muller has conducted seminars for the chicago board of trade, including a key series in 1999 which cautioned about a top in the equity markets (see his article “top experts and statistics on the dow”). adrian muller has appeared on cable tv financial programs with analysis on the futures markets and equity market directional forecasts. he has been quoted in barron's, the wall street journal, and futures magazine.

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