Day trading and options trading are two forms of trading that have traditionally existed on separate planes. However, this has changed in recent years as an increasing number of traders are discovering ways to use proven day-trading strategies to trade options profitably. Options trading is a great option because it usually requires a smaller initial investment and allows traders to cut losses easily. When you combine the advantages of options trading with the fast pace and high potential returns of day trading, you’ll significantly increase your profit opportunities. Below is a comprehensive guide to day trading options successfully.

What Are Day Trading and Options Trading?

Day trading is a form of stock trading in which traders buy and sell stocks within a single trading day with the intention of making profits from small price fluctuations. While it requires substantial knowledge and time commitment, this type of trading is appealing because it enables you to work from anywhere, create your own success, make quick profits, and avoid overnight risk.

When you’re trading options, you’re buying or selling a type of derivatives. Derivatives are a form of securities that are valued according to the prices of underlying assets, which can be stocks, commodities, bonds, or currencies. Similar to stocks, their prices can fluctuate, but the fluctuations are based on the values of the underlying assets. Although it isn’t very popular, options trading offers many benefits, including substantial cost savings, lower risk compared to equities, potential to deliver high percentage returns, and freedom to choose from a variety of strategic alternatives.

Can You Day Trade Options to Make Money?

Day trading stock options is worth your consideration if you’re looking for a low-risk way to get into day trading. Using day-trading strategies to trade options is actually a very sensible move, especially if you don’t have a big account. It allows you to mitigate risk and protect your capital while gaining good opportunities to make profits. The following are some of the benefits of day trading options:

  • Low cost: An option is considerably less expensive than an underlying asset or stock. As such, your entry into a trade will be easy and has a lower impact on your capital. Also, an option contract has an expiration date, so you’ll know from the beginning that exiting the trade is going to be easy. All you have to do is decide whether or not to execute by a specific date.
  • Diversity: Options trading enables you to diversify your investments while staying close to your day trading comfort zone. You have the freedom to explore a variety of opportunities because it’s cheaper to buy an options contract than an actual stock.
  • High profit potential: Day trading options is attractive because it can potentially net you big profits. Since you’ve agreed on a certain buying or selling price, you can profit substantially from a big movement in the price of the stock. Volatility can be an important asset when it comes to day trading options.

Types of Options

Before you start looking for the best stocks for options day trading, you should have at least a basic understanding of the different types of options available. There are many different kinds of options that can be traded, but you don’t have to know all of them to learn how to make money day trading options. Below are the two main types of options:

Call Option

Similar to a prospector’s choice, a call option gives you an opportunity to make an investment for the future. If you believe that an asset will reach a certain value within a specific timeframe, you can buy a call option for the asset. All you need to do is lock in a price and purchase the asset if it meets your requirements within a certain amount of time.

However, day trading call options involves some risk or consideration. The seller of the asset won’t give you the opportunity to purchase it without some form of collateral. Usually, you’re required to place a deposit or pay a premium, which is a percentage of the total purchase. As the buyer of a call option, you can benefit from buying the asset if its price goes up within the specified window of time. Nonetheless, if the option expires and you decide not to buy the asset, you’ll lose the deposit or initial payment.

Put Option

If a call option is meant for prospectors, a put option is for traders who want to limit their bets. It’s a contract that allows you to sell an asset at a certain point in the future if your criteria are met. After setting a strike price, you can sell the asset at that price at any time before the option expires. The benefit of buying a put option is that you can still fetch your desired price within the predetermined timeframe even if the price of the asset goes down.

Similar to a call option, a put option involves some risk. As the seller, you’ll receive a down payment or premium from the buyer. A put option represents a portion of an asset. Typically, it’s one out of 100 shares of an asset, so the deposit will be 1% of the total purchase.

How to Find the Best Stock Options to Day Trade

Now that you’ve understood how the two main types of options work, you can proceed to learning how to find potentially profitable opportunities for day trading options. The following are a few techniques you can add to your arsenal:

Conduct Technical Analysis

By conducting technical analysis, you’ll be able to determine the extent, direction, and duration of a stock’s movement more accurately. If you have some experience in day trading, you should know that technical analysis is essential for narrowing down your stock choices. However, it’s also an effective tool for identifying desirable options to day trade. Since option contracts have expiration dates, you should use targeted technical indicators to make better-informed trading decisions. It’s recommended that you use the following indicators:

  • Bollinger Bands: This is a technical analysis indicator that measures volatility. It consists of bands that expand with higher volatility and contract with lower volatility. A stock is likely overbought if its price is nearer to the upper band and oversold if its price is closer to the lower band.
  • IMI: IMI stands for Intraday Momentum Index, which is an indicator that helps you analyze options from an intraday perspective.
  • MFI: MFI, or Money Flow Index, is an indicator that displays price and volume data at the same time. It monitors the flow of money into and out of a security within a certain timeframe.
  • RSI: RSI is the acronym for Relative Strength Index. This indicator facilitates the comparison of gains and losses over a certain amount of time. It enables you to determine if a stock is overbought or oversold by looking at its price movements.

Trade at the Right Time

Timing is especially vital in day trading. In order to time your trades with precision, you need to do proper research before the stock market is in full swing. This can help you identify opportunities more accurately. To be properly prepared, you have to review the latest developments in the stock market and foreign markets and check indicators and charts to see if there are any trends.

Useful Day Trading Options Strategies

Besides knowing how to look for the right stock options, you also need to know some useful tips and tricks to minimize your risk and maximize your profit potential when day trading options. The following are a few option day trading techniques you should incorporate into your overall strategy:

  • Use stop orders: You can place stop orders when day trading options. By doing so, you can ensure that your options order will be executed at the market price if the value of the asset reaches your specified price. This gives you more control over the trade and helps limit your losses.
  • Look for higher volatility: An option is a portion of an asset that’s worth more, which means that the more it moves, the more you stand to gain. Generally, there’s more volatility in options trading because options represent assets or stocks that are relatively expensive.
  • Stay focused: You need to be able to think and move fast if you want to succeed in options day trading. This type of trading requires you to take many things into consideration, so you have to be constantly focused. Monitor the indicators and charts closely so that you can make an exit at the right time.

Day trading options is a great form of trading because it enables you to expand your repertoire, trade with greater flexibility, and increase your profit potential. You can also potentially reduce your risk because you don’t have an obligation to exercise your options. Nonetheless, you have to invest substantial time and effort to learn how to trade options successfully. If you want to improve your trading knowledge and skills, consider attending our free Bootcamp to learn real-life tips and tricks from our renowned trading experts.

Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of and the Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

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