Options day trading

options day trading Day Trading - Swing Trading Options - Strategy and Examples. Have you ever bought a stock that you &ldquoknew&rdquo was breaking out of its trading range? Have you ever had to sell that stock out at the end of the day because you were unable to hold it overnight, only to see that exact stock gap open $2.00 the next day? Has missing this type of opportunity left you frustrated? What about bottom fishing?

Have you ever bought a stock on the way down, then had to sell it out at the end of the day for even-money or maybe a small profit&hellip only to wake the next morning to see the stock gap open dollars up? Tired of watching these available profits hit someone else&rsquos account instead of yours? Too often, day traders and swing traders are forced out of these opportunities. Typical day traders and swing traders who look for stocks with quick, short term movements are not in the business of holding positions overnight, let alone a week or two. Therefore, the use of options is not a component of their trading strategies. Now, however, new opportunities for profit are becoming available as many day trading firms are allowing their traders to trade options.

Unfortunately, many option strategies do not apply to the quick in and out nature of day trading or swing trading. For instance, neither day traders or swing traders are normally in a single stock long enough for the strategy of premium collection. However, there is a strategy that will provide the protection necessary for these traders to carry positions through overnight risk, fully protected, but still allow them to take optimum advantage of the two scenarios mentioned above. As a result, you can now put dollars in your own pocket instead of watching them go to somebody else, and do so without putting your firm&rsquos capital at risk overnight.

This particular strategy is a premium purchasing strategy. It can allow day traders and swing traders the capital security to exploit two potentially explosive profit scenarios &hellip breakouts and bottom fishing. Since day traders and swing traders have had no reason to deal with options until now, we&rsquoll explain options, detail a specific option strategy, and give examples of when it can be used and the outcomes that can be expected.

Options are a wasting asset, meaning they have a limited life and lose value over time. Therefore, you want to use them quickly and then sell them out to avoid as much decay loss as possible. There are two kinds of option philosophies premium collecting (selling options) and premium purchasing (buying options).

The latter may fit into some of the strategies used by day traders and swing traders. There are several premium purchasing strategies, and each can be used in several ways. Some are very sophisticated and take time and effort to master. Others, like the protective put, are not as sophisticated and can be learned and implemented in a reasonably short amount of time. Strategies like the protective put require a rudimentary understanding of options, as opposed to time intensive expertise.

This is because the protective put strategy is purely defensive in nature. It functions as strict hedging, not profit capturing. Profit capturing can involve more risk than a hedging position, and requires a greater level of knowledge. In the case of the protective put, the determination of when to use it is the crucial element for its success. With our focus on breakouts and bottom fishing, the &ldquoProtective Put&rdquo is the strategy we&lsquoll detail.

The Protective Put, also referred to as the &ldquomarried put,&rdquo the &ldquoputs and stock&rdquo or &ldquobullets,&rdquo is a strategy that is ideal for a trader who wants full hedging coverage. This strategy is very effective with stocks that normally trade under high volatility or stocks that may be involved in an event-driven, high-volatility situation. The put option gives the owner of the option the right, but not the obligation, to sell a certain stock, at a certain price, by a specified date. For this right, the owner pays a premium. The buyer, who receives the premium, is obligated to take delivery of the stock should the owner wish to sell at the strike price by the specified date.

A put, strategically used, offers protection against substantial loss since the stock will be taken by the buyer before heavy losses set in. The Protective Put Strategy involves the purchase of put options in conjunction with the purchase of stock and, as stated above, works well in situations where a stock is prone to rapid, volatile movements. For day traders and swing traders, this strategy can allow the capital security to exploit two potentially explosive profit scenarios&hellip. breakouts and bottom fishing. These two opportunities can be very profitable but also very dangerous.

With these two scenarios, timing is the key element. Enormous profits can be had if your timing is right. However, if the timing is wrong, the effects can be devastating. If a trader can take advantage of the full profit potential of these two scenarios without having the full risk associated with them, logic dictates that the trader stands a much better chance of seeing a substantial profit.

When traders purchase a stock that they expect will make a sudden upward move, they can buy the put (protective put) to provide a proper hedge. The construction of this position is actually quite simple. You buy the stock and you buy the put in a one-to-one ratio, meaning one put for every one hundred shares. Remember, one option contract is worth 100 shares.

So, if 400 shares of IBM are purchased, then you would purchase exactly four puts. From a premium standpoint, we must keep in mind that by purchasing an option, we are paying out money. This means that our position must &ldquooutperform&rdquo the amount of money that we paid out for the put. If the put costs $1.00, then the stock would have to increase in price by $1.00 just to break even. The protective put strategy has time premium working against it, thus the stock needs to move up to a greater degree and more quickly to offset the cost of the put.

However, the price of the put can be adjusted depending on whether it is at-the - money or out-of-the-money. The choice of whether to purchase the at-the-money put or an out-of-the-money put simply comes down to how much protection you want to have versus the amount of money you want to spend. If you are willing to spend more money for your protective put in order for it to start providing downside protection at an earlier price, then you may want to buy the at-the - money put. However, if you are willing to accept a little more downside risk in order to save money on your put purchase, then you may want to buy an out-of-the-money put instead. It will cost less than the at-the-money put but it will start its protection at a lower price, which means you will lose more money if the stock moves in the adverse direction.

HOW THE PUT WILL PERFORM. Let's take a look at the risks and rewards of the protective put strategy over three different scenarios. When we buy a stock, three potential outcomes exist. The stock can go up, go down, or remain stagnant.

Let's hypothesize results across these three scenarios. Say we buy the stock for $31.00 and buy the 30 strike put for $1.00. In the up scenario, we set the stock price up at $31.50. The results are that we have a $.50 gain from capital appreciation and a $1.00 loss from the purchase of the put, which when combined, gives us a $.50 loss overall. It is important to realize that the up scenario will only produce a positive return if the stock gain is greater than the amount paid for the put. This being the case, you calculate the breakeven point for the protective put strategy by adding the purchase price of the stock to the price of the put.

In our up scenario, add the stock price of $31.00 plus the option price of $1.00, and you get a breakeven of. $32.00. So, until the stock reaches $32.00, the position will not produce a positive return. Above $32.00, the position will gain. In the stagnant scenario, the position will produce a loss. Since the stock hasn&rsquot moved, there will be no capital gain or loss.

Also, with the stock at $31.00 at expiration, the puts are worthless. The position lost $1.00, which is the amount you paid for the puts. In the down scenario, the position will again produce a loss. Setting the stock at $30.00, down a dollar, we have a $1.00 capital loss.

With the stock at $30.00, the 30 strike puts will be worthless, thus you incur a $1.00 loss because that is what you paid for them. Your total loss will be $2.00. However, in any down scenario, the protective put will set a cap on your losses. Let&rsquos see how that works. We&rsquoll set the stock price down to $28.00. Since you purchased the stock at $31.00, there will be a capital loss of $3.00. The puts, however, are now in the money with the stock below $30.00. With the stock at $28.00, the 30 strike puts are worth $2.00. You paid $1.00 for them so you have a $1.00 profit in the puts. Combine the put profit ($1.00) with the capital loss ($3.00) and you have an overall loss of $2.00. The $2.00 loss is the maximum you can lose no matter how low the stock goes, even with the stock as low as zero.

This is what is meant by maximum protection. In every protective put position, it is possible to calculate your anticipated maximum loss. You can do so by using the following formula (stock price minus strike price) minus option price. For example, suppose you paid $30.00 for your stock, and you paid $1.00 for the 27.50 strike puts.

Following the formula, you take your stock price ($30.00) and subtract the put&rsquos strike price (27.50), which leaves you with $2.50. To this $2.50 loss, you then subtract the amount you spent on the option (-$1.25), which gives you a combined, maximum loss of $3.50 for this position. This formula will work every time. Remember, stock loss (stock price paid - strike price) plus option cost equals maximum potential position loss.

Looking at the three hypothesized scenarios, we find that only the up scenario can produce a positive return, and that&rsquos only when the stock increases more than the amount you paid for the puts. The other scenarios produced losses. If the stock is stagnant, you lose the amount you paid for the put. If the stock goes down, you lose again - but the loss is limited. It is the limiting of loss in highly volatile situations that makes the protective put an attractive and useful strategy.

PROTECTIVE PUT'S BEST SCENARIO. A stock that has the potential to rise quickly also has the potential to fall just as quickly. A stock that has substantial potential gain has an equal potential loss. A trader choosing to buy a stock like this should have more protection to the downside, and at the same time, ample allowance for a large upside potential move. This is a perfect time to use the protective put strategy.

The purchase of an out-of-the-money put will be a relatively inexpensive investment, but will provide the kind of results that will best fit a bullish lean. You will have unlimited downside protection with all the room you need for your potential run up. Of course, this comes at a price. You must pay for the protection and freedom this position can provide. The protective put strategy, when used correctly, will allow investors to take advantage of some opportunities that could provide large potential gains without being exposed to the severe risks the position would have posed without the use of protective puts.

Use the Protective Put in the case of a stock in the process of a steep decline. Quite often, stocks experience bad news or break down through a technical support level, and trade down to seek a new, lower trading range. Everyone wants to find the bottom in order to buy and catch the technical rebound. Although this scenario sounds good, these types of trades are risky. The risk is in identifying the true bottom.

A stock that is in a free-fall or rapid decline might give a false indication of a bottom, which could lead to substantial losses. The protective put will provide protection against this kind of substantial loss. A stock that goes through a free-fall finally &ldquoexhausts&rdquo or works through the sellers.

The stock proceeds down to lower levels where sellers are no longer interested in selling the stock. At this level, the stock consolidates and buyers move in. Because the sellers are now done (exhausted), the pressure is lifted from the stock and it proceeds up as buyers out-number sellers. There are models that are used to calculate where this bottom may lie, commonly referred to as &ldquoexhaustion models.&rdquo The problem is that the stock, on the way down, may stop and give the appearance of exhaustion but then continue further down.

If you had bought at the false appearance of exhaustion, you could be looking at a big loss. There is a potential for a very big reward if you pick the &ldquoright&rdquo bottom. However, with the big potential gain comes the big potential loss that is common in these types of riskreward scenarios.

Here is a perfect opportunity to employ the protective put strategy! Remember, the protective put allows for a large potential upside with a limited, fixed downside risk. If you feel that the stock has bottomed-out and is starting to consolidate, you purchase the stock and purchase the put. If you are right, and the stock runs back up, the stock profit will well exceed the price paid for the put. Once the stock trades back up, consolidates, and develops its new trading range, the need for the protective put is over.

Use the formula for maximum loss discussed earlier. Calculate the loss in the stock and the amount you paid for the put, and add them together for your maximum loss in this position. The protective put has limited your loss. Maximum Loss = (Stock Price &ndash Strike Price) &ndash Option Price. As seen with the exhaustion example, the protective put strategy is best used in situations where the stock has potential for an aggressive upside move and the chance of a big downside move.

Another potential opportunity for using the protective put is in combination with Technical Analysis. Technical Analysis is the study of charts, indicators oscillators, etc. Charting has proven to be more than reasonably accurate in forecasting future stock movements. Stocks travel in cycles that can and do form repetitious patterns.

These patterns are predictable and detectable by the use of any number of charts, indicators and oscillators. Although there are many, many forms and styles of technical analysis, they all have several similarities. The one we want to focus on is the technical &ldquobreak - out&rdquo. A break-out is described as a movement of the stock where its price trades quickly through and beyond an obvious &ldquotechnical resistance&rdquo or resistance point. For a bullish break-out, this level is at the very top of its present trading range.

Once through that level, the stock is considered to have &ldquobroken out&rdquo of its trading range and will now often trade higher, and establish a new higher trading range. The &ldquobreak-out&rdquo is normally a rapid, large upward movement that usually offers an outstanding potential return if identified properly and acted upon in a timely fashion. However, if the break-out fails, the stock could trade back down to the bottom of the previous trading range.

If this were to happen, you would have incurred a large loss because you would have bought at the upper end of the previous trading range. As you can see, the &ldquobreak-out&rdquo scenario is an opportunity that has large potential rewards, but can, on occasion, have a large downside risk. However, if you were to apply a protective put strategy with the stock purchase, you can drastically limit your downside exposure.

For instance, say you were to buy the 65 strike put for $2.00. If the stock trades up to $75.00, you would make $9.00 if done naked, but only $7.00 if done with the protective put. This difference is the cost of the put. This $2.00 investment is more than worth it should the stock go down. If the break-out turns out to be a &ldquofalse&rdquo break-out and the stock reverses and trades down, your 65 put will allow you to sell your stock out at $65.00 minus the $2.00 you paid for the put.

This limits your loss to $3.00 instead of a potential $8.00 loss. This is a much better riskreward scenario. Use the Protective Put when you expect an aggressive, volatile, upward swing in the price of a stock.

Purchase one put for every one hundred shares owned. Time and price the put for the maximum protection according to your risk parameters. Choose a put that presents the best cost for the needed coverage that fits your risk tolerance.

Get out of the put quickly to diminish the effects of time decay. Most professional traders, including day traders and swing traders can reap huge rewards from the protective put strategy. The reason is inherent in how most traders attain profits and experience losses. Normally, successful traders make a little money on a consistent basis.

They make a little bit day-in and day-out. But when it comes to losses, they lose in large chunks. They spend a month building up profits, only to lose that money in one day (and typically with only one stock).

If a trader could figure out how to avoid even a handful of those large losses, then his or her profitability would soar. To address this issue, I strongly recommend that you leverage the protective put when buying on breakouts and when bottom fishing. Day Trading using Options. With options offering leverage and loss-limiting capabilities, it would seems like day trading options would be a great idea.

In reality, however, the day trading option strategy faces a couple of problems. Firstly, the time value component of the option premium tends to dampen any price movement. For near-the-money options, while the intrinsic value may go up along with the underlying stock price, this gain is offset to a certain degree by the loss of time value. Secondly, due to the reduced liquidity of the options market, the bid-ask spreads are usually wider than for stocks, sometimes up to half a point, again cutting into the limited profit of the typical daytrade.

So if you are planning to day trade options, you must overcome this two problems. Your DayTrading Options Near-month and In-The-Money. For daytrading purposes, we want to use options with as little time value as possible and with delta as close to 1.0 as we can get.

So if you are going to daytrade options, then you should daytrade the near month in-the-money options of highly liquid stocks. We daytrade with near-month in-the-money options because in-the-money options have the least amount of time value and have the greatest delta, compared to at-the-money or out-of-the-money options. Furthermore, as we get closer to expiration, the option premium is increasingly based on the intrinsic value, and so the underlying price changes will have a greater impact, bringing you closer to realising point-for-point movements of the underlying stock. Near month options are also more heavily traded than longer term options, hence they are also more liquid.

The more popular and more liquid the underlying stock, the smaller the bid-ask spread for the corresponding options market. When properly executed, daytrading using options allow you to invest with less capital than if you actually bought the stock, and in the event of a catastrophic collapse of the underlying stock price, your loss is limited to only the premium paid. Another Day Trading Option The Protective Put. If you are planning to daytrade a particular stock for short upside moves for the next few months, you can purchase protective put options to insure against a devastating stock crash. Buying Straddles into Earnings.

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. Read on. Writing Puts to Purchase Stocks. If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount.

Read on. What are Binary Options and How to Trade Them? Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. Read on. Investing in Growth Stocks using LEAPS® options. If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®.

Read on. Effect of Dividends on Option Pricing. Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. Read on. Bull Call Spread An Alternative to the Covered Call. As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement.

In place of holding the underlying stock in the covered call strategy, the alternative. Read on. Dividend Capture using Covered Calls. Some stocks pay generous dividends every quarter.

You qualify for the dividend if you are holding on the shares before the ex-dividend date. Read on. Leverage using Calls, Not Margin Calls. To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk.

A most common way to do that is to buy stocks on margin. Read on. Day Trading using Options. Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading.

Read on. What is the Put Call Ratio and How to Use It. Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. Read on. Understanding Put-Call Parity. Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969.

It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. Read on. Understanding the Greeks. In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions.

They are known as "the greeks". Read on. Valuing Common Stock using Discounted Cash Flow Analysis. Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow.

Read on. My Simple Strategy for Trading Options Intraday. I rarely come across a trader that has not traded options. Options strategies come in many shapes and forms, but they are all intended to do one thing make money. I’ve been trading since 1980 and was at one time one of the largest options traders in the brokerage industry until the crash of 1987, which brought a new realization that holding a leveraged position overnight could be devastating, and it was.

Though I still trade options, I have a totally different perspective on how and when to trade them. First, I am an S&P futures trader. I have been trading and following the S&P futures since they began trading in 1982.

So I have learned to trade options based on the one thing I know best, the S&P 500 futures. Learn how to Trade Options with ConnorsRSI with Connors Research newest options strategy guidebook. On sale here. The S&P 500 future of the 1980’s was much different than the futures we know today. Because of the boom in technology over the past 15 years, most of the trading done today is all electronic as opposed to picking up the phone and calling a broker or the pit.

And the economy of today is now global instead of being country specific. These factors have led the trading industry to look at the markets in a broader perspective where our markets will react with what happens in Europe or Asia. Not only this, but the markets are becoming a 24 hour market instead of just the standard 830 am – 300 pm CT (930 am – 400 pm EST) here in the U. S. Since the markets are based on a 24 hour basis, we now can see how the world values our markets and get a better understanding on how our markets will perform based on how the world has traded. I start my trading day early (500 am CT600 am ET) to begin to get the direction of the markets going through Europe and coming into the U. S. open.

The E-mini S&P Futures (E = Electronic) is the choice of S&P futures traders in this day, and mine, because it is always electronic and trades virtually 24 hours a day. The direction the E-mini (the term used for the E-mini S&P futures) is trading gives signals to how the U. S. markets will open. Though equity options cannot be traded until after 830 am CT (930 am ET), I can begin to start setting up my trading strategy based on what the E-mini has done throughout the night. The majority of stocks (around 70%) will move in the same direction as the E-mini.

Knowing this, by the time the U. S. opens at 830 am CT (930 am ET), I know if the majority of stocks will open down or up based on what the E-mini has done throughout the night. Once the U. S. market opens, the U. S. gets to “vote” on the direction of the world markets. Because of this, I like to give the market one hour before entering into an options trade. This gives the U. S. market time to digest the move of the world markets and any economic news that has been announced. Looking a Chart 1, you can see the direction of the world markets and how it affects the U. S. markets.

To trade options, I use a basic strategy. If the market is going up, I buy calls or sell puts. If the market is going down, I sell calls or buy puts.

I prefer to be a seller of options rather than a buyer however, there are some equities that move well enough in a day that buying the option pays better than selling the option and waiting for it to deteriorate. Apple is a good example of this. Apple is one of the stocks that track very well with the E-mini (for this reason I will use it as an example in this article). Chart 2 shows a daily chart of Apple (AAPL) and the E-mini (@ESM9).

Though stocks have individual news and can move more at times (or less), they will generally trend with the E-mini. As stated earlier, I like to give the market the first hour of trading to get the “noise” out of the market. I then look at where the E-mini is trading based off of its open (up or down) and the overall direction of the market for the day, and see if Apple is trading in the same direction based off its open. If so, I will buy an at-the-money, or first strike out-of-the-money, call if heading higher, or put if heading lower. I then give the market 30 minutes to see if the direction I traded is right.

If so, I place a stop at half of the value I paid for the option, i. e. – If I bought the option for $5.00, I place a stop at $2.50. If the market has turned and I am not getting paid, I will get out of the position and look for another opportunity later. If the trade is going in my direction, then I will reevaluate it at 100 pm CT (200pm ET). If the market reverses, then I get out. If the market continues in my direction, I stay with the trade and move my stop just to the other side of the open by about 10 cents and then look to re-evaluate the trade at 230 CT (330pm ET) before the market closes.

Chart 3 shows Apple and the E-mini on May 26, 2009. The E-mini started higher and continued the trend going into 930 am CT (1030 am ET). Apple was following the trend and was trading around $128-$129 at 930 am CT (1030 am ET). The closest strike would have you buying the June 130 call on Apple. Chart 4 is the Apple June 130 call (APV FF) that you could have entered around $4.20-$4.30. At 1000 am CT (1100 am ET) it was trading at $4.35 was holding up. At this time, a protective stop would be put in at $2.10 and left for reevaluation at 100 pm CT (200 pm ET). At 100 pm CT the call was trading at $5.65 and the stop was adjusted to $2.40 (10 cents below the open of $2.50) and left to see where it was at 230 pm CT (330pm ET). The market had pulled back a bit, and the call was at $5.10 which was 55 cents below where it was at 100pm CT, so the trade would have been exited at that time with an 80 cent profit.

This is just one example of a stock that can be traded throughout the day. If I can’t get into a trade at 930 am CT (1030 am ET), I will look to enter after 100 pm CT (200 pm ET) and follow the same procedure going into the close. Using the direction of the futures to get the trend shifts the odds in your favor of getting paid. There are many stocks out there, just verify that they trend with the E-mini before using them in this manner. Happy trading!

Tom Busby is founder of DTI and a pioneer in the trading industry as a world-recognized educator. He takes a complex subject, the global markets, and puts it into an easy-to-understand language for all levels of traders and investors. With guest speaking spots on Bloomberg and CNBC, Mr. Busby is also the author of two best-selling books, Winning the Day Trading Game and The Markets Never Sleep. He is a member of the Chicago Mercantile Exchange Group and has been a professional securities trader and broker since 1977.

Options Basics Tutorial. Nowadays, many investors' portfolios include investments such as mutual funds, stocks and bonds. But the variety of securities you have at your disposal does not end there. Another type of security, known as options, presents a world of opportunity to sophisticated investors who understand both the practical uses and inherent risks associated with this asset class.

The power of options lies in their versatility, and their ability to interact with traditional assets such as individual stocks. They enable you to adapt or adjust your position according to many market situations that may arise. For example, options can be used as an effective hedge against a declining stock market to limit downside losses. Options can be put to use for speculative purposes or to be exceedingly conservative, as you want. Using options is therefore best described as part of a larger strategy of investing.

This functional versatility, however, does not come without its costs. Options are complex securities and can be extremely risky if used improperly. This is why, when trading options with a broker, you'll often come across a disclaimer like the following Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss.

Only invest with risk capital. Options belong to the larger group of securities known as derivatives. This word has come to be associated with excessive risk taking and having the ability crash economies.

That perception, however, is broadly overblown. All “derivative” means is that its price is dependent on, or derived from the price of something else. Put this way, wine is a derivative of grapes ketchup is a derivative of tomatoes. Options are derivatives of financial securities – their value depends on the price of some other asset.

That is all derivative means, and there are many different types of securities that fall under the name derivatives, including futures, forwards, swaps (of which there are many types), and mortgage backed securities. In the 2008 crisis, it was mortgage backed securities and a particular type of swap that caused trouble. Options were largely blameless. (See also 10 Options Strategies To Know . ) Properly knowing how options work, and how to use them appropriately can give you a real advantage in the market.

If the speculative nature of options doesn't fit your style, no problem – you can use options without speculating. Even if you decide never to use options, however, it is important to understand how companies that you are investing in use them. Whether it is to hedge the risk of foreign-exchange transactions or to give employees ownership in the form of stock options, most multi-nationals today use options in some form or another. This tutorial will introduce you to the fundamentals of options.

Keep in mind that most options traders have many years of experience, so don't expect to be an expert immediately after reading this tutorial. If you aren't familiar with how the stock market works, you might want to check out the Stock Basics tutorial first. How Options are Traded.

Many day traders who trade futures, also trade options, either on the same markets or on different markets. Options are similar to futures, in that they are often based upon the same underlying instruments, and have similar contract specifications, but options are traded quite differently. Options are available on futures markets, on stock indexes, and on individual stocks, and can be traded on their own using various strategies, or they can be combined with futures contracts or stocks and used as a form of trade insurance. Options markets trade options contracts, with the smallest trading unit being one contract. Options contracts specify the trading parameters of the market, such as the type of option, the expiration or exercise date, the tick size, and the tick value.

For example, the contract specifications for the ZG (Gold 100 Troy Ounce) options market are as follows Symbol (IB Sierra Chart format) ZG (OZG OZP) Expiration date (as of February 2007) March 27 2007 (April 2007 contract) Exchange ECBOT Currency USD Multiplier Contract value $100 Tick size Minimum price change 0.1 Tick value Minimum price value $10 Strike or exercise price intervals $5, $10, and $25 Exercise style US Delivery Futures contract. The contract specifications are specified for one contract, so the tick value shown above is the tick value per contract. If a trade is made with more than one contract, then the tick value is increased accordingly.

For example, a trade made on the ZG options market with three contracts would have an equivalent tick value of 3 X $10 = $30, which would mean that for every 0.1 change in price, the trade's profit or loss would change by $30. Options are available as either a Call or a Put, depending on whether they give the right to buy, or the right to sell. Call options give the holder the right to buy the underlying commodity, and Put options give the right to sell the underlying commodity. The buying or selling right only takes effect when the option is exercised, which can happen on the expiration date (European options), or at any time up until the expiration date (US options). Like futures markets, options markets can be traded in both directions (up or down).

If a trader thinks that the market will go up, they will buy a Call option, and if they think that the market will go down, they will buy a Put option. There are also options strategies that involve buying both a Call and a Put, and in this case, the trader does not care which direction the market moves. With options markets, as with futures markets, long and short refer to the buying and selling of one or more contracts, but unlike futures markets, they do not refer to the direction of the trade. For example, if a futures trade is entered by buying a contract, the trade is a long trade, and the trader wants the price to go up, but with options, a trade can be entered by buying a Put contract, and is still a long trade, even though the trader wants the price to go down. The following chart may help explain this further Limited Risk or Limitless Risk.

Basic options trades can be either long or short and can have two different risk to reward ratios. The risk to reward ratios for long and short options trades are as follows As shown above, a long options trade has unlimited profit potential, and limited risk, but a short options trade has limited profit potential and unlimited risk. Ready to start building wealth? Sign up today to learn how to save for an early retirement, tackle your debt, and grow your net worth. However, this is not a complete risk analysis, and in reality, short options trades have no more risk than individual stock trades (and actually have less risk than buy and hold stock trades).

When a trader buys an options contract (either a Call or a Put), they have the rights given by the contract, and for these rights, they pay an up front fee to the trader selling the options contract. This fee is called the options premium, which varies from one options market to another, and also within the same options market depending upon when the premium is calculated. The options premium is calculated using three main criteria, which are as follows In, At, or Out of the Money - If an option is in the money, its premium will have additional value because the option is already in profit, and the profit will be immediately available to the buyer of the option. If an option is at the money, or out of the money, its premium will not have any additional value because the options is not yet in profit.

Therefore, options that are at the money, or out of the money, always have lower premiums (i. e. cost less) than options that are already in the money. Time Value - All options contracts have an expiration date, after which they become worthless. The more time that an option has before its expiration date, the more time there is available for the option to come into profit, so its premium will have additional time value. The less time that an option has until its expiration date, the less time there is available for the option to come into profit, so its premium will have either lower additional time value or no additional time value.

Volatility - If an options market is highly volatile (i. e. if its daily price range is large), the premium will be higher, because the option has the potential to make more profit for the buyer. Conversely, if an options market is not volatile (i. e. if its daily price range is small), the premium will be lower. An options market's volatility is calculated using its long term price range, its recent price range, and its expected price range before its expiration date, using various volatility pricing models. Entering and Exiting a Trade.

A long options trade is entered by buying an options contract and paying the premium to the options seller. If the market then moves in the desired direction, the options contract will come into profit (in the money). There are two different ways that an in the money option can be turned into realized profit. The first is to sell the contract (as with futures contracts) and keep the difference between the buying and selling prices as the profit. Selling an options contract to exit a long trade is safe because the sale is of an already owned contract.

The second way to exit a trade is to exercise the option, and take delivery of the underlying futures contract, which can then be sold to realize the profit. The preferred way to exit a trade is to sell the contract, as this is the easier than exercising, and in theory is more profitable, because the option may still have some remaining time value. How I Day Trade the SPY. Many people think day trading is gambling you might win for awhile, but eventually you will blow up your account.

I agree—yet I day trade the SPY almost every day. Day trading is part of my overflow method and multiple strategy approach to managing my portfolio. I day trade very little capital, and I direct the profits into my less risky accounts. So why bother if day trading is gambling?

Simply put, I can increase my odds of a successful return using money management techniques. I fully expect to some day lose all of the money in my day trading account—the goal is to multiply the capital I started with many times over before that happens. This strategy works because I day trade with a tiny percentage of my entire investment portfolio, and the amount I am willing to risk remains constant—meaning that I do not attempt to compound my returns profits are removed from the account right away.

Already this year I have doubled the money in my day trading account (not bad considering that we are only 8 weeks into the year). And because this profit has been redirected, even if I made only losing trades from now on I would have nothing to lose because I am, so to speak, playing with the house’s money. This is what I mean by money management acknowledging that at any time you could blow up your account and protecting your base by resisting the temptation to compound. Don’t Compound, Got It. But How Do You Trade? Though day trading is gambling, you can leverage technical indicators and your own expertise to enter and exit trades with higher success rates.

Here’s my formula for setting up daily trades I only trade the SPY, which I have monitored for so long that my gut often predicts how it will move. No joke. When you’re hyperfocused, investing with your gut can be effective. I use weekly options to add leverage and reduce the capital required.

I always trade at the money call or put that’s going to expire at the end of the week. This option normally has a delta around .50, which means that if the SPY moves a $1.00 the option will increase (or decrease) in value by $0.50—a 50% return if the option you are buying costs $1.00. I buy only calls and puts—no fancy spreads. I try to be in a trade for 40 minutes max. Sure, sometimes a trade lasts a few hours, but I always close the trade at the end of the day no matter what. I like to enter my trades around 100 pm EST when more often than not trading is flat the news from the morning has already been traded on, and many traders are taking a lunch break.

By 130 or 200 the SPY is moving and shaking again. I enter a trade knowing whether the SPY is bullish or bearish on that day, and I never buck the trend if the SPY is pushing up I trade calls if the SPY is going down I trade puts. If the market seems flat—the RSI and MACD indicators are not hitting extremes throughout the day—I just stay out. I make only one trade per day.

If I am trading more than that most likely I am either cocky and think I can make more money or I am trying to fix a loss trade—both are bad ideas. I never risk more than 30% of my trading account’s capital in any one trade. Yes, this percentage is high, but I am only risking money I’m willing to lose. That said, the SPY is stable so in reality the risk is more like 15%. If the conditions are right I scale into a trade up to 4 times the dollar-cost average.

I only scale down, never up—meaning I buy more as the price drops, and when I close the trade I sell everything (I do not scale out). I time my entry by waiting for the RSI to cross 70 or 30 and then wait for the MACD lines to cross and proceed in the other direction. I also make sure the MACD histogram bars clearly resemble rolling hills, an indicator that the SPY is not flat. At this point I enter, and if the SPY continues to drop I buy more on the way down. After entering a trade I always set a closing trade price, typically 20% higher than the option purchase price.

Doing so protects me in the case of an upward spike in the market and frees me from being glued to the computer screen. I do not set stop losses. The SPY is not crazy volatile and almost always I have some money left if a trade goes against me. Plus, I never risk more than I can handle losing. Stop losses are bad because sometimes the market really has to fall before it can pick back up. I have been down 50% only to be up 20% 10 minutes later. I rely on my gut to time my exit (one of the reasons I have not automated this trading style).

I always set out aiming for a 20% return, but if the market is not accelerating I will lower my goal until it corresponds to the reality of what the market is yielding. If a trade goes against me I simply wait for an uptick and use that opportunity to close the losing trade. Almost every day some buyer comes in and pushes the SPY up or down faster than normal in one big trade, but if not I sell at 359 and go all cash.

I have set these rules for myself over many years of day trading. To get a sense of how they play out in the real world, let’s walk through a trade I made on February 23, 2015. (*Note.

The times in the graph are PST.) From the start of the day the market was bullish—notice how the chart is pushing up rather than down—so I was looking to trade calls. At 1235 EST the RSI crossed the 30 line—meaning the SPY was most likely going to start moving up again. I didn’t make a move yet, but turned my attention to the MACD. About 15 minutes later the MACD lines crossed, confirming that the SPY was ready to move up. Notice that the MACD histogram bars clearly resemble rolling hills.

At 100 EST I entered a trade by buying SPY Feb 27 2015 210 Calls for $1.19. I benefitted from a big seller coming in right before I entered the trade, pushing the SPY down. If this event had happened later I might have scaled in and purchased more calls, but on this day one open and one closing trade did the trick. I set a limit order to sell all the options at a price of $1.43 (a 20% gain). At 130 EST I lowered my limit order to $1.37 (a 15% gain) because the market was bouncing around too much for me to be confident. At 140 EST a big buyer came in and pushed the SPY up in price.

My limit order hit, the trade was closed for a 15% gain. Most winning days play out just like this example. Though I don’t count on big buyers or sellers moving the SPY and helping me enter or exit a trade at better prices, it happens frequently and it sure is nice when it does.

Don’t Just Be a Day Trader. I just painted you a pretty rosy picture of how you can generate outsized returns day trading. The thing is, every day is different and a few bad days will certainly wipe out your account.

But if you adhere to the overflow method you can use day trading profits to juice the returns of a less risky trading strategy. Day trading is also a good way to stay engaged with the market every day and sharpen your trading skills. Such experience and knowledge make you to a better credit spread trader or buy-and-hold investor.

And, of course, day trading is a fun rush. Day-Trading Margin Requirements Know the Rules. We issued this investor guidance to provide some basic information about day trading margin requirements and to respond to frequently asked questions. We also encourage you to read our Notice to Members and Federal Register notice about the rules. Summary of the Day-Trading Margin Requirements.

The rules adopt the term "pattern day trader," which includes any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period. Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades. The required minimum equity must be in the account prior to any day-trading activities.

If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level. The rules permit a pattern day trader to trade up to four times the maintenance margin excess in the account as of the close of business of the previous day. If a pattern day trader exceeds the day-trading buying power limitation, the firm will issue a day-trading margin call to the pattern day trader. The pattern day trader will then have, at most, five business days to deposit funds to meet this day-trading margin call.

Until the margin call is met, the day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on the customer's daily total trading commitment. If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met. In addition, the rules require that any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls remain in the pattern day trader's account for two business days following the close of business on any day when the deposit is required.

The rules also prohibit the use of cross-guarantees to meet any of the day-trading margin requirements. Frequently Asked Questions. The primary purpose of the day-trading margin rules is to require that certain levels of equity be deposited and maintained in day-trading accounts, and that these levels be sufficient to support the risks associated with day-trading activities. It was determined that the prior day-trading margin rules did not adequately address the risks inherent in certain patterns of day trading and had encouraged practices, such as the use of cross-guarantees, that did not require customers to demonstrate actual financial ability to engage in day trading.

Most margin requirements are calculated based on a customer's securities positions at the end of the trading day. A customer who only day trades does not have a security position at the end of the day upon which a margin calculation would otherwise result in a margin call. Nevertheless, the same customer has generated financial risk throughout the day.

The day-trading margin rules address this risk by imposing a margin requirement for day trading that is calculated based on a day trader's largest open position (in dollars) during the day, rather than on his or her open positions at the end of the day. Were investors given an opportunity to comment on the rules? The rules were approved by the NASD Regulation Board of Directors and then filed with the Securities and Exchange Commission (SEC). On February 18, 2000, the SEC published NASD's proposed rules for comment in the Federal Register. The SEC also published for comment substantially similar rule changes that were proposed by the New York Stock Exchange (NYSE).

The SEC received over 250 comment letters in response to the publication of these rule changes. Both the NASD and NYSE filed with the SEC written responses to these comment letters. On February 27, 2001, the SEC approved both the NASD and NYSE day-trading margin rules.

As noted above, the NASD rules became operational on September 28, 2001. Day trading refers to buying then selling or selling short then buying the same security on the same day. Just purchasing a security, without selling it later that same day, would not be considered a day trade. Does the rule affect short sales? As with current margin rules, all short sales must be done in a margin account.

If you sell short and then buy to cover on the same day, it is considered a day trade. Does the rule apply to day-trading options? Yes.

The day-trading margin rule applies to day trading in any security, including options. What is a pattern day trader? You will be considered a pattern day trader if you trade four or more times in five business days and your day-trading activities are greater than six percent of your total trading activity for that same five-day period. Your brokerage firm also may designate you as a pattern day trader if it knows or has a reasonable basis to believe that you are a pattern day trader.

For example, if the firm provided day-trading training to you before opening your account, it could designate you as a pattern day trader. Would I still be considered a pattern day trader if I engage in four or more day trades in one week, then refrain from day trading the next week? In general, once your account has been coded as a pattern day trader, the firm will continue to regard you as a pattern day trader even if you do not day trade for a five-day period. This is because the firm will have a "reasonable belief" that you are a pattern day trader based on your prior trading activities. However, we understand that you may change your trading strategy.

You should contact your firm if you have decided to reduce or cease your day trading activities to discuss the appropriate coding of your account. Day-Trading Minimum Equity Requirement. What is the minimum equity requirement for a pattern day trader? The minimum equity requirements on any day in which you trade is $25,000. The required $25,000 must be deposited in the account prior to any day-trading activities and must be maintained at all times.

Why is the minimum equity requirement for pattern day traders higher than the current minimum equity requirement of $2,000? The minimum equity requirement of $2,000 was established in 1974, before the technology existed to allow for electronic day trading by the retail investor. As a result, the $2,000 minimum equity requirement was not created to apply to day-trading activities Rather, the $2,000 minimum equity requirement was developed for the buy-and-hold investor who retained securities collateral in hisher account, where the securities collateral was (and still is) subject to a 25 percent regulatory maintenance margin requirement for long equity securities. This collateral could be sold out if the securities declined substantially in value and were subject to a margin call.

The typical day trader, however, is flat at the end of the day (i. e., he is neither long nor short securities). Therefore, there is no collateral for the brokerage firm to sell out to meet margin requirements and collateral must be obtained by other means. Accordingly, the higher minimum equity requirement for day trading provides the brokerage firm a cushion to meet any deficiencies in the account resulting from day trading. How was the $25,000 requirement determined? The credit arrangements for day-trading margin accounts involve two parties -- the brokerage firm processing the trades and the customer.

The brokerage firm is the lender and the customer is the borrower. In determining whether the existing $2,000 minimum equity requirement was sufficient for the additional risks incurred with day trading, we obtained input from a number of brokerage firms, since these are the entities extending the credit. The majority of firms felt that in order to take on the increased intra-day risk associated with day trading, they wanted a $25,000 "cushion" in each account in which day trading occurred. In fact, firms are free to impose a higher equity requirement than the minimum specified in the rules, and many of them already had imposed a $25,000 requirement on day-trading accounts before the day-trading margin rules were revised. Does the $25,000 minimum equity requirement have to be 100 percent cash or could it be a combination of cash and securities?

You can meet the $25,000 minimum equity requirement with a combination of cash and eligible securities. Can I cross-guarantee my accounts to meet the minimum equity requirement? No, you can't use a cross-guarantee to meet any of the day-trading margin requirements. Each day-trading account is required to meet the minimum equity requirement independently, using only the financial resources available in the account. What happens if the equity in my account falls below the minimum equity requirement?

If the account falls below the $25,000 requirement, you will not be permitted to day trade until you deposit cash or securities in the account to restore the account to the $25,000 minimum equity level. I'm always flat at the end of the day. Why do I have to fund my account at all? Why can't I just trade stocks, have the brokerage firm mail me a check for my profits or, if I lose money, I'll mail the firm a check for my losses?

This would in effect be a 100 percent loan to you to purchase equity securities. It is saying you should be able to trade solely on the firm's money without putting up any of your own funds. This type of activity is prohibited, as it would put your firm (and indeed the U. S. securities industry) at substantial risk. Why can't I leave my $25,000 in my bank?

The money must be in the brokerage account because that is where the trading and risk is occurring. These funds are required to support the risks associated with day-trading activities. It is important to note that the Securities Investor Protection Corporation (SIPC) may protect up to $500,000 for each customer's securities account, with a limitation of $250,000 in claims for cash. What is my day-trading buying power under the rules?

You can trade up to four times your maintenance margin excess as of the close of business of the previous day. It is important to note that your firm may impose a higher minimum equity requirement andor may restrict your trading to less than four times the day trader's maintenance margin excess. You should contact your brokerage firm to obtain more information on whether it imposes more stringent margin requirements. What if I exceed my day-trading buying power? If you exceed your day-trading buying power limitations, your brokerage firm will issue a day-trading margin call to you.

You will have, at most, five business days to deposit funds to meet this day-trading margin call. Until the margin call is met, your day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on your daily total trading commitment. If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.

Does this rule change apply to cash accounts? Day trading in a cash account is generally prohibited. Day trades can occur in a cash account only to the extent the trades do not violate the free-riding prohibition of Federal Reserve Board's Regulation T. In general, failing to pay for a security before you sell the security in a cash account violates the free-riding prohibition. If you free-ride, your broker is required to place a 90-day freeze on the account. Does this rule apply only if I use leverage?

No, the rule applies to all day trades, whether you use leverage (margin) or not. For example, many options contracts require that you pay for the option in full. As such, there is no leverage used to purchase the options.

Nonetheless, if you engage in numerous options transactions during the day you are still subject to intra-day risk. You may not be able to realize the profit on the transaction that you had hoped for and may indeed incur substantial loss due to a pattern of day-trading options. Again, the day-trading margin rule is designed to require that funds be in the account where the trading and risk is occurring. Can I withdraw funds that I use to meet the minimum equity requirement or day-trading margin call immediately after they are deposited?

No, any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls must remain in your account for two business days following the close of business on any day when the deposit is required.