Day Trading Options


Day trading options is a very risky game. Not only are options risky assets to begin with, but day trading is a particularly risky form of investing. Trying to predict price movements on an intraday basis is not an easy task, and when you throw decaying assets into the mix, it’s a borderline recipe for disaster.

Here are some of the top reasons why you should and should not day trade options:

Reasons to Day Trade Options

  • Collect option premium by selling options (can’t do this with stocks)
  • Keep your max-loss risk very small (only when buying options)
  • Trading 1 options contract is cheaper than trading 100 shares

Reason NOT to Day Trade Options

  • If it is more expensive to trade options than stocks
  • Options decay and can expire totally worthless
  • Increased leverage could result in total loss of capital

A Little Information about Options

Options provide additional leverage. This is a very important fact that wee need to keep in mind when discussing options. Professional investors, like hedge funds, pension funds, and endowments, seldom use options, because they have ample funds and buying power. They don’t need any additional leverage.

If hedge funds decide to use options, it’s usually to take advantage of an inherent characteristic of an options contract, like premium decay.

Overtime, the value of any options contract that is out of the money will asymptotically approach zero until it reaches expiration, where it will ultimately expire worthless if it is not in the money.

Therefore, some investors look to sell options to take advantage of this premium decay. This is a solid strategy that works well, right up until the moment that it doesn’t.

Selling options is what Nassim Taleb refers to as the “Bob Rubin” trade. Where someone can make over $100,000,000 over the course of ten years, and then lose billions in a few days when the same strategy that has worked for a decade suddenly implodes due to a market crash. If you sell an options contract, your hope is that the value declines and ultimately the options contract expires worthless. If it doesn’t expire worthless, however, you will be obligated to buy back the option or the corresponding amount of stock at a loss. This is where the danger of options comes in, because, remember, options are leveraged instruments. If short options position moves against you, the losses could be very significant.

Why Bother Day Trading Options?

The only real reason to day trade options, as opposed to day trading the underlying stock, is because you want to sell options on an intraday basis.

For example, say stock XYZ is trading at $75 per share in the morning, and you are bearish and want to short the stock. You could sell out of the money call options in the morning and buy those same call options back at the end of the day, hopefully for a profit if stock XYZ declines. Additionally, some time value, known as theta decay, will come out of the value of the option. This would be an options “day trade.” Hopefully, you will benefit from a decline in the stock price as well as theta decay.

Keep in mind, the PDT (pattern day trader) rules still apply for options. If your total brokerage account value is less than $25,000, you can only make three day trades per rolling 5 trading days. If you make four or more day trades in one week, you will receive a PDT violation from your broker, informing you that you cannot make any more day trades or risk not being able to trade for 90 days.

You won’t owe any additional money if this happens, but a PDT violation can be a headache. Assuming your account equity is less than $25,000 the only way around the PDT rule for options or stocks is to have multiple brokerage accounts, and therefore increase the number of day trades you can make in a week.

Consider Day Trading Stocks Instead

With all of this said, there is one reason to buy options in a day trade situation. If it costs $5.00 to buy stock, you could buy up to 4 options contracts for less than the price of buying 400 shares, assuming you’re paying $1.00 per options contract.

By buying call or put options at $1.00 per contract, you will almost always save on commissions by day trading options vs day trading stocks.

TradeStation is a great broker that has per contract options pricing of $1.00.

Recap: Benefits of Day Trading Options

So, if your heart is set on day trading options, it makes sense if you’re doing any of the following:

  1. Wanting to save on commissions by purchasing 100 share stock at a time by purchasing 1 options contract at a time (effective way to scale into and out of day trading positions without getting crushed on stock trading commissions)
  2. Want specifically sell options to capture premium decay and establish a bullish or bearish intraday position.

If you want to day trade, chances are you already have at least 2:1 or 4:1 intraday leverage for stocks. Keep in mind that some options markets are not as liquid as the underlying stock itself.

If you want to actively buy and sell options, you could lose money on the spread if it’s too wide. See a list of the best stocks for options trading that have very tight and efficient markets and are excellent choices for day trading.

TRADE OPTIONS FOR $1open a TradeStation account & on options trades
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