Day Trading Options

Day trading is a style that can be used for pretty much any form of financial trading, including stocks, forex, and futures as well as options. Traditionally, it was a style used only by financial institutions and professionals, but it has become increasingly more popular among home based traders too. There are a number of reasons for this, but it's largely due to the effect of online technology which has made it much easier to make financial transactions quickly and also increased the amount of data and information that can be accessed.

Because day trading often involves taking advantage of small price movements, the fact that you can use leverage when buying and selling options makes them a particularly suitable financial instrument for this style. On this page we explain more about day trading options and what is involved, and we also offer useful advice. The following is covered:

  • What does Day Trading Options Involve?
  • Who Uses This Style?
  • Advice for Day Trading Options
  • Options Brokers for Day Trading Options

What Does Day Trading Options Involve?

The basic concept of day trading options is very simple; the idea is that you make a number of transactions during the day with the aim of making quick profits. The general rule is that you close all your open positions by the close of business so you know exactly where you stand at the end of the day. With this style you can buy and sell a variety of different types of options and can use a number of different strategies.

Some trades can involve buying and selling options contracts within a matter of minutes, while others may involve taking a position early in the day and closing it close to the end of the day. This depends to some degree on what opportunities you discover and what sort of strategies you are using.

The main appeal of this style is that it is, in theory at least, possible to make quick profits over and over again during the course of the day. Those that use this style successfully are familiar with finding opportunities that have a good chance of offering positive returns.  Of course, there is never a guarantee that each and every opportunity will be profitable.

This style is sometimes known as active trading, and you do have to be active to use it successfully. You need to be able to spot opportunities for profit and react quickly. The main principle is to take advantage of small price movements in the underlying security of options, so timing is very important. A few minutes delay can quite conceivably mean a missed opportunity, or at the very least a reduction in the potential profits.

Who Uses This Style?

As we have already mentioned, day trading any kind of financial instrument used to be done only by the expert professional that worked for banks and other financial institutions, and maybe the occasional private investor. These days, however, it's a style that is favored by many more private investors and it's continuing to grow in popularity. The obvious advantages of being able to make quick profits, as opposed to holding onto investments with a view to making a return further down the line, have resulted in it becoming significantly more mainstream.

Day trading options, in particular, makes it possible to make impressive returns from relatively small amounts through the use of leverage. The goal is to benefit from small movements in the prices of stocks, and other underlying securities, and options can help to multiply the potential gains from such losses.

Options are powerful tools if used correctly, and there are many traders that make serious amounts of money purely through making quick trades during the course of each and every day. It should of course be pointed out that using leverage can also multiply potential losses, and there are risks involved.

The main point, really, is that basically anyone can get involved with day trading; you don’t need to work for a large financial organization and you don’t need huge sums of money to get started. Anyone that is prepared to put in the necessary time to fully learn what they need to know and then analyze the markets on a daily basis to highlight opportunities is ultimately capable of being successful. With that said it's not really recommended for complete beginners.

Advice for Day Trading Options

There are certain pieces of advice that anyone interested in day trading options should be aware of. First and foremost, it's intense and time consuming and you need to be prepared for what is involved. It's not possible to implement this style properly unless you have the time and a commited personality to dedicate yourself to watching the markets throughout the day.

You need to be alert at all times and ready to act when the timing is right. As such, you also require the ability to analyze situations quickly and execute your trades accordingly. If you don’t think you can cope with the demands, then you should consider other styles.

You should also have a solid understanding of the various strategies that can be applied, and know how and when to use them. You need to be very disciplined, and be able to keep emotions out of the equation. There can be a high level of risk involved, so you need to be prepared to accept that too.

You can, to some extent, limit the risk that you are exposed to by using spreads and stop loss orders to minimize losses, but there is still going to be risk involved. Risks are particularly high when the market is volatile, although it's generally volatile market conditions that also present the most profitable scenarios.

Although you don’t necessarily need huge amount of capital to get started, depending on how much you are looking to make, you should have enough funds to cover yourself if some trades go bad or if you have a stretch of unprofitable days. You also need to make transactions at the appropriate level for the budget you have; many amateur day traders go broke simply because they run out of capital due to not managing their money correctly.

There is no doubt that it's possible to make good money from day trading options. It is by no means easy though, and you really need to have the right skills as well as dedication and commitment. If you feel you are ready to give it a go then it is a very good idea to paper trade for a short while before actually using real money. This will get you used to what is involved and give you some indication as to whether you have the right character and skill set to make it work.

Options Brokers for Day Trading Options

Choosing the right broker is a very important decision for an options day trader. In particular, there are two things that you really need: the ability to place orders quickly when you spot an opportunity and low commissions. Because the very nature of this style is all about reacting quickly, any delay in instructing your broker can be very costly. You will also be making lots of trades, so low commissions are even more important than for other styles.

The only logical choice is to use an online broker. Online brokers tend to be the cheapest in terms of commissions, and you can place your orders much more quickly than if you had to make a phone call to your broker. For a list of suitable recommendations, please visit our page at Best Brokers for Active Trading.