Options are financial instruments that consist of a contract that aims to trade an underlying asset at a future date. The price of an option is much lower than the price of the underlying asset, for this reason, these types of financial instruments have become very popular for day traders. In this article, we will show you everything you need to know about day trading options so that you can exploit your earnings with this trading strategy. It is important to take into account that options are complex instruments and although they have the potential to generate great profits, you must be careful because they can also generate great losses.
If you are an investor or are considering investing your capital, you need to complement your strategies with expert financial advisory services. In this way, you will be able to make better decisions, choose the best balance between risk capital and structure profitable investment plans. In this sense, we believe that Capitalist Exploits is a good alternative, especially for beginners in the world of trading. Its new “themes” approach and its high value, low-risk recommendations offer a great alternative for both experienced traders and beginners. For these reasons, we recommend Capitalist Exploits.
Before talking about day trading options we will cover some definitions about options and the day trading strategy. So, you can take advantage of this modern fusion between a short term investment strategy with a financial derivative that is usually used for medium-term investments. You will see that there are investment opportunities with day trading options.
What Is Day Trading
Day trading consists of the purchase and sale of financial assets during the same day. That is, at the end of each day you must close all positions. You can make this type of short-term investment in different markets:
- Raw Materials
This type of strategy requires doing a lot of buying and selling negotiations throughout each day. In general, the earnings of each of the positions are not very high. Even so, it is possible to get returns thanks to the number of transactions. An attractive factor of this technique is that at the end of each day it is possible to determine the profit or loss that has been obtained. The analysis methodology with the Day Trading strategy to open and close positions consists of making an exhaustive technical analysis.
Take into account that the technical analysis consists of determining the price of financial assets from the trend or pattern analysis. Later, we will show you a section dedicated to the different types of technical analysis indicators and you will even see a couple of examples.
What Are Options?
Options are financial instruments consisting of a contract that is intended to trade an underlying asset at a future date. That is, options are contracts where a price is set today but the underlying asset will be traded in the future.
Please note that options are contracts that are based on packages of 100 stocks. Also, the options can be to buy or to sell.
Option Price Vs. Price Of The Underlying Asset
You must consider the option price to be a much smaller amount than the price of the underlying asset. The option price is the cost that the buyer pays to be able to have the right to execute the contract or not. Also, the option price is the profit that the seller of the option has that obliges him to fulfill the contract.
Call options are known as “calls” and give the investor who buys the call the right to execute or not to execute the buy order of the underlying asset. For its part, the investor who sells the call has the obligation to sell the underlying asset as long as the investor who bought the option wants to execute the contract.
For example, think of a certain stock that has a price of $100 USD. If you believe that this stock will go up to $120 USD, then you could buy a call that gives you the right to buy shares at $110 USD and that forces the counterparty to sell them to you. Take into account that these types of contracts have two scenarios:
- Scenario # 1 (you execute the option): In the future, the prices of the underlying asset in the market will rise to $120 USD. In this scenario, you simply execute the option and the counterparty sell you the stocks for $110USD, which would earn you $10 USD per stock. In this scenario, the option is in-the-money.
- Scenario # 2 (do not execute the option): The prices of the underlying asset in the market will rise only up to $108 USD. In this scenario, the best decision you can make is not to execute the call option that gives you the right to buy the underlying asset for $110 USD because it is preferable to buy the cheapest stocks on the market at $108 USD. In this scenario the option is out-of-the-money.
Put options are known as “puts” and give the investor who buys the put the right to execute or not to sell the underlying asset. For its part, the investor who sells the put has an obligation to buy the underlying asset.
For example, if you think that the prices of certain stocks that are trading at $ 100 USD will drop to 80 USD in the future, then you could buy a put option that entitles you to sell shares for $ 90 USD in the future and compel the counterparty to buy them. Note that if this scenario happens you could win as follows: You buy the shares on the market for $ 80 USD and then sell them for $ 90 USD thanks to the fact that you have a put option.
So, in summary, Options give the owner the right to execute the contract and, the buyer generates the obligation to buy or sell the underlying asset defined in the option contract.
Day Trading Options
For day traders, options are a good opportunity to generate profits. Furthermore, options have several exploitable qualities with a day trading strategy.
- It is possible to diversify: It is possible to buy options on hundreds of underlying assets. This feature allows day traders to diversify their investment portfolio day by day.
- Profit potential: Because the contract has a defined price in the case where the underlying asset has a large movement it is possible to get large profits.
- Options are affordable: The market price of the options is much lower than the price of the underlying assets. This makes it accessible to day traders for the low cost.
- Easy to trade: You can buy options the same way you would trade stocks. This feature gives day trading the possibility to speculate with the intention of buying the options to sell them at a higher price.
Day Trading SPY Options
Thanks to the flexibility of the options, it is possible to buy options on indexes such as Standard & Poor’s 500 (S&P 500). The SPY is the ticker of the ETF that replicates the S&P 500. In the stock market it is possible to buy or sell options on SPY with the strategy of day trading. Take into account that the ticker is an abbreviation with which the financial instruments are identified in the stock market.
The SPY seeks to replicate the S&P 500 index, so when you buy options on the SPY you should be aware of the S&P 500 index (the index ticker is SPX). Please note that there may be discrepancies between SPY and SPX for the simple reason that SPY seeks to adjust SPX. You could make big profits with options if you watch for these discrepancies because they usually affect the price of options.
Day Trading Weekly SPY Options
The weekly options are very similar to the standard options except that their duration is short-term. Concerning the expiration time, there are two types of options, monthly and weekly. Both types of options have become financial instruments that can be used with day trading strategies.
These types of options are very popular because as they are short term they are very sensitive to news. In this way, day traders can take advantage of abrupt movements in quotes and at low-cost thanks to one of the features that we talked about earlier: their low cost.
Day Trading Options: Technical Analysis
It is not enough to see the evolution of the option prices for you to make buying or selling decisions. It is also necessary that you do a technical analysis that allows you to find the best opportunities. In this section, we will tell you about the indicators most used by traders. We will also show you examples so you can see how technical indicators are used to make investment decisions.
MACD – Moving Average Convergence/Divergence
This indicator has the function of identifying changes in the trend and direction of prices. It consists of the evolution of two moving averages with different periodicity to determine patterns of changes.
RSI – Relative Strength Index
The RSI determines if the market is overbought or oversold. Analysis is very important to establish whether there will be a reversal in the price trend. The index works with exponential averages. If the RSI is above 70, the market is overbought, but if, on the contrary, the indicator is below 30, the market is oversold.
ATR – Average True Range
The indicator takes into account the closing price of the previous day with an exponential average, and depending on the market trend (bullish or bearish), it subtracts the high or low of the current day from the closing price of the previous day.
SMA – Simple Moving Average
They are ideal for smoothing price data series and making identifying the direction of trends easier, which is especially useful in volatile markets.
It consists of two standard deviation lines, which indicate support and resistance levels. If the price touches any of these bands there is a possibility that the trend will suddenly change.
Do You Need Expert Help?
Definitely yes! Take into account that you should always analyze to make the best decision. In this sense, you should complement your investment ideas with the recommendations of a qualified advisor. In fact, we suggest our post “Capitalist Exploits: A Measured Approach To Achieving Asymmetric Returns“. There you will learn much more about investing and get great recommendations.
Below you can see a summary table with the main features of Capitalist Exploits:
|How do they select investments?||Capitalist Exploits seeks investment opportunities worldwide through in-depth analysis, market research, and investment networks. |
The team looks for the best investment opportunities in different sectors, industries and global markets.
Then they determine if the opportunity can be safely seized. After identifying opportunities, they estimate the risk associated with each investment to select the best risk-capital ratio.
The next step is to identify the most appropriate way to allocate capital in each scenario. In this way, investors can adapt to possible changes.
|Are the recommendations diversified?||Yes, they provide a high level of diversification because Capitalist Exploits seeks investment opportunities worldwide in and out of the stock market.|
|Do they help you analyze each recommendation?||Yes|
|Do they generate free content?||Yes, the company offers free content and a blog with highly relevant podcasts and opinion pieces. Capitalist Exploits also offers a private Telegram channel called “Hedgies Uncut”. There, hedge fund managers discuss their investment positions and ideas.|
|What type of investor is it for?||Anyone with any level of experience or geographic location can use the service. It is ideal for both long-term and short-term investors who are looking for investment opportunities in and out of the stock market. For example, shipping, energy, natural resources, Bitcoin and many more.|
Summary Of This Day Trading Options
- Day trading consists of the purchase and sale of financial assets during the same day. That is, at the end of each day you must close all positions.
- Options are financial instruments that consist of a contract that aims to trade an underlying asset at a future date.
- Call options are known as “calls” and give the investor who buys the call the right to execute or not the buy order of the underlying asset.
- Put options are known as “puts” and give the investor who buys the put the right to execute the order to sell the underlying asset.
- For day traders, trading options is a good opportunity to generate profits.
- Thanks to the flexibility of options, it is possible to buy options on indices like the S&P 500.
- The weekly options are very similar to the standard options except that their duration is short-term.
- You should always analyze to make the best decision. In this sense, you should complement your investment ideas with the recommendations of a qualified advisor.
Please note that options are complex instruments. We recommend a reputable and reliable investment advisor. If you are just starting out in the investment world, or are already a professional, but don’t want to be exposed to high risks, we recommend that you join Capitalist Exploits today for three reasons:
- The first is that Capitalist Exploits provide an incredible amount of information about financial markets that help beginners learn.
- The second is that Capitalist Exploits is focused on identifying high-return, low-risk investment opportunities, which is exactly what someone who is just starting out on business needs.
- Finally, the level of diversification offered by Capitalist Exploits will allow you to create more efficient portfolios to achieve your goals.