How to Day Trade Options

If you aren’t interested in a high-risk and fast-paced trading environment, Day trading might not be right. It involves buying and selling securities within the same trading day where traders can profit from short-term price movements. Risks aside, day trading provides some prime opportunities to profit quickly compared to other trading forms.

Mastering the art of day trading options could unlock exciting profit opportunities—but only if you know what you’re doing! Our guide will cover everything you need to know about day trading and how you can get started even if you’re not familiar with how it works. Keep reading to learn about the benefits and risks of day trading. We’ll even highlight what you need to get started and experience success!

What Is Day Trading Options?

To help you understand the essence of day trading options, we’ll outline the official definition, how day trading differs from other trading styles, and why day traders prefer options as opposed to other financial instruments. Hopefully, this will give you a good understanding of how options work and if day trading might be a good form of trading for you to get into.

Definition

Day trading options entail the buying and selling of securities on the same day where traders take advantage of small, short-term price fluctuations. According to the FINRA definition, day trading usually involves trading the same security within a margin account. It’s a fast-paced form of trading that requires a good grasp of trading options to maximize profit in the midst of incurring higher-than-usual transactional costs.

How It Differs From Other Trading Styles

Day trading is appealing to many investors due to all trades being executed the same day as opposed to other trading styles that have a more long-term outlook.

• Swing Trading—This is a trading style where investors look to exploit short- to medium-term price movements in security by using risk/reward metrics. Entry and exit points are determined by technical analysis, plus fundamental analysis is used as an added filter. The main difference between day trading and swing trading is the length of time the trade is held—swing trading is performed over multiple days or months, while day trading is done on the same day.
• Long-Term Investing—This style of trading and investment involves buying stocks or other assets and holding them for years to profit from slow price increases. The biggest difference between this and day trading is that the length of time the trade is held is much longer when it comes to long-term investing.

Why Day Traders Prefer Options

Day traders like trading options more so than other financial instruments for several reasons:

• Leverage—Day traders can borrow funds from their brokers to control larger trading positions than what their capital allows. This allows traders to trade larger amounts of an asset with a smaller initial investment. The leverage that comes with day trading lets investors capitalize on quick market movements.
• Lower Capital Requirement Compared to Stocks—Trading stocks can be a lot more costly for traders and requires a lot more upfront capital for investors to get an ownership take in the company. Day traders prefer options for the fact that they allow them to control a larger position with less money.
• Flexibility With Strategies—Trading options opens up a wider range of possibilities for day traders to use multiple options trading strategies to navigate things like market volatility or the time left to expiry. With the limited time that day traders have to make a profit, the flexibility that comes with trading options is the ideal situation.

Benefits and Risks of Day Trading Options

While day trading allows traders to accumulate significant profits over the course of one day, it also involves quick entries and exits which must be done with the right timing to get around potential losses. Day trading is made for some traders and not so much for others—it comes with some unique benefits and risks that we’ll highlight here. Find out if day trading is right for you!

Benefits

• Potential for Quick Profits—Day trading allows investors to make small, quick gains in the market. It’s done through buying and selling securities on the same day using a technique known as scalping. Traders make numerous small profits on the same day through frequent trades where they capitalize on short-term price fluctuations.
• Ability to Capitalize on Short-Term Market Movements—Day traders profit from these short-term market movements by entering and exiting positions rapidly, which lets them exploit the bid-ask spread. It’s a terrific, though risky, method for achieving quick profits which also involves the use of tight stop-loss orders to limit potential losses.
• Lower Capital Investment—Due to options leverage, day traders can enter the market with a smaller amount of capital. It’s largely achieved by carefully managing trade sizes and using effective trading techniques that limit the risk that could possibly be incurred on each trade.

Risks

• High Volatility Leading to Significant Losses—Day trading often involves stocks experiencing large and fast price swings and traders must correctly speculate on price action. As volatility increases, traders stand to make more money quickly, but if they’re incorrect in their predictions, this can lead to some significant losses.
• Time Decay Impact—Also known as Theta decay, time decay erodes the value of an option as it gets closer to its expiration date. Since options with more time have a lower rate of time decay, the shorter options that day traders are dealing with are far more susceptible to time decay. This can lead to limited profits or a loss in the event a price movement isn’t big enough to offset time decay.
• Transaction Costs Can Add Up—Because day trading involves a lot of little buy and sell orders, the transaction costs can add up and significantly impact a trader’s profit margins. It’s key for day traders to realize enough profits to offset what they pay in transactional costs.
• Psychological Stress of Rapid Decision-Making—Day trading can be highly stressful due to uncertainty and market volatility. It’s a profession that’s not for the faint of heart, so it might not be the best kind of online trading for everyone. It requires a lot of logical, objective thinking, sticking with a sound trading strategy/plan, and a decent knowledge of market indicators to properly maneuver volatility.

Essential Requirements for Day Trading Options

One of the biggest disadvantages to day trading is that there are some higher requirements needed to get started. Not only do traders need a hefty amount of money to get off the ground, but they also need to possess a decent knowledge of trading techniques that help deal with short-term positions. We’ll run through the essential day trading requirements to give you an idea of the commitment you might be facing when getting into day trading.

Knowledge

You cannot be successful with day trading options if you don’t have an understanding of the basics of options. This includes understanding concepts like call options or put options as well as the “Greeks.” Traders must have a firm grasp of these concepts if they want to stand a chance with quickly entering and exiting positions to realize a profit amid market volatility. A bit later on in this guide, we’ll address some of these concepts to help you get started!

Broker and Tools

Choosing the right broker for day trading depends on your style and preferences, but there are indeed some advantages to using certain options brokers over others. Select a broker that offers both paper trade and real-time data so you can practice without financial risk. Consider fees that come with each broker app to find out if your overhead is low enough that you can still make a profit each day.

Desktop platforms are preferred, though it’s possible to day trade using mobile option broker apps too. The desktop platforms generally have better trading features and allow you to trade in an environment where you can access multiple scenes for a more focused experience.

Capital

Day trading in the United States falls under the pattern day trader rule which requires a $25,000 minimum account balance. This applies to those who perform four or more day trades within five business days. However, this is the minimum balance, so it’s best to trade with more to always have enough to cover the required minimum. Ultimately, day traders should have $30,000 in their accounts to cover any kind of losses they might incur.

Risk Management Plan

An effective risk management plan is another one of the secret weapons that option day traders can use to minimize potential losses and keep more of their money out in the market working for them. Day traders should use only 1-2% of their capital in any one position in their portfolio. This is what’s known as a conservative position unit and even using 2% is a bit daring. Ideally, it should only be 1% of your available capital allocated to each trade.

Aside from properly positioning your capital across your portfolio’s investments, it’s important to set stop-loss orders where positions are automatically sold when they reach a certain price point. These are set up by traders based on their criteria and they’re used to minimize potential losses. Positions that are losing too much money are sold as soon as possible, freeing up capital to be used on a more profitable venture.

Mindset

The psychology of the day trader includes the following attributes and practices:

• Practicing Emotional Control: Day traders don’t allow themselves to be subjected to their emotions while trading. They form a trading plan for each day (rooted in research and analytics) and stick to that strategy for the day. They see how effective it was at the end of their trading session and then make adjustments from there.
• Setting Clear Goals: Day traders should have a firm trading plan at the beginning of the trading day that has goals in mind. This includes desired profit targets, risk management parameters, and tactics for preserving capital through a short trading timeframe while raking in profits.
• Managing Risk: Day traders use a clear position size for each trade (1%) and use stop-loss orders to rid their portfolios of positions that have lost too much value (avoiding Theta decay). Managing risk and keeping transaction costs to a minimum help day traders to keep as much as possible in profit from their successful trades.
• Learning From Losses: Day traders view losses as a learning opportunity that they can use to better inform their future trading sessions. The best day traders document everything that happens during their sessions including the entry and exit points of all their traders, any profits or losses that occurred, the strategy being used, and how they felt after each session. They use this info to get better.
• Maintaining Positivity: Along with viewing losses as learning experiences and having a persistent attitude, options traders should maintain positivity, seeing the good even when the market conditions aren’t the best. The best day traders make the most of these times and know just the trading strategy to realize a profit based on various market movements.
• Seeking a Support Community: Day traders should make a concerted effort to reach out and network with other traders to share knowledge with one another and keep each other’s skills sharp with discussions on the broader market and personal experiences.
• Openness to Mentorship: Continuous learning is another critical aspect of succeeding when trading options daily. Day traders can benefit greatly from knowing traders with more experience whom they share their experiences with. Those with more trading experience have a lot to offer traders just starting out or even traders who have intermediate or advanced experience.

Key Concepts and Strategies for Day Trading Options

To be successful in day trading, you must know the key concepts and trading strategies associated with this form of options trading. Not only will we highlight the best day trading techniques, but we’ll also cover the key concepts that are a must-know such as the importance of the Greek measurements and factors like IV and option contract liquidity.

Understanding Key Concepts

Let’s go over some of the critical concepts that are useful for traders to know if they wish to succeed in day trading. This part of the guide will highlight the importance of the Greeks, implied volatility, and liquid options contracts for day traders. These key concepts can help traders to better enter and exit positions quickly to remain profitable in their sessions.

The Greeks

This set of measurements is used to indicate how sensitive an option’s contract price is to changes in various market factors. It’s important for day traders to understand the Greeks to correctly assess how an option might react to different market movements.

– Delta: This Greek measures the relationship between an options price and the underlying security’s price. It’s the direction of the option, which can be neutral, bullish, or bearish.
– Gamma: This Green measures how much the option’s Delta will change for every $1 change in the price of the underlying asset. The Delta could drastically change with small changes in price when the Gamma value is higher.
– Theta: This Greek measures how much an options contract’s value will lose each day as it comes closer to its expiration date.
– Vega: This Greek measures how sensitive options are to large price swings in the underlying asset.
– Rho: This Greek measures how sensitive an option contract’s price is to the changes in interest rates.

Implied Volatility

This metric is a key factor in determining the price of option contracts making it an important tool for day traders. Implied volatility is a metric that gauges how much the market expects an asset’s price to fluctuate over a given period of time. Options with higher premiums usually indicate a greater rate of implied volatility. It doesn’t always correctly forecast how the market will move in the future, but it’s a helpful tool for informing some trading decisions nonetheless.

Liquidity

When securities are liquid, it means that they are easy and quick to buy and sell. Options with higher liquidity are best for day trading because this form of trading is contingent on traders being able to enter and exit positions quickly to take advantage of small price movements. Not only are liquid options contracts ideal for the efficient execution that day traders look for, but they also come with reduced trading costs due to their narrower bid-ask spreads.

Popular Day Trading Strategies

What are some of the best strategies for trading options contracts during the same business day? Let’s look at some of the most popular day trading techniques that many experienced traders have had a lot of success with.

• Momentum Trading—When it looks as if an options contract is losing momentum, momentum traders will sell these securities. This technique has traders buying rising securities and then selling them when it looks as though they have reached their peak. Investors trade in the direction of the momentum, which involves correctly identifying breakout points.
• Scalping—This technique has traders buying and selling securities quickly to profit from minor price changes. Scalping is done through many trades per day, but traders might only hold onto these positions for a few seconds or minutes. At the very most, they might sit in positions for a few hours. The idea is to take advantage of small price movements and realize a profit through the volume of trades being conducted.
• Volatility Crush Play—Day traders can also use a technique that involves trading options around major events like earnings announcements. It allows traders to take advantage of sudden drops in implied volatility. Traders can profit from the difference in the price between when they bought and sold options—the rule of thumb in volatility crush plays is to buy when IV is low and sell when IV is high.
• Straddle—The straddle involves buying and selling a call and put option at the same strike price and expiration date—it’s best used when traders aren’t sure which way the market will move, but they’re expecting there to be volatility.
• Strangle—Another great technique is the strangle, which again profits from market volatility, where traders combine a call option above the current market price and a put option below it (both have the same expiration date.
• Trend Reversal Trades—This day trading technique involves identifying overbought/oversold conditions. The goal is to profit by taking an opposite position to the current market trend. Day traders are betting that the price direction is about to change. The price of the asset changes significantly by moving from an uptrend to a downtrend (or the other way around).

Step-by-Step Guide to Day Trading Options

If you’re curious about what the day-to-day routines and rituals of a day trading might look like, we’ll outline everything here in a step-by-step guide to give you a taste of the average day trader’s day. This might look different going from one day trader to the next, but we feel these are the best practices to get into if you want to succeed in profiting from day trading.

1. Research and Plan

To be fair, some of this first step happens the night before after the market has closed for the day and the trader has taken the time to review the day’s session. They would review any relevant news or market developments that night and then follow up the next morning before that day’s trading session is to begin.

Research and planning involve actions like analyzing upcoming economic data releases, analyzing the broad market, checking technical indicators on their preferred charts, assessing opportunities based on their strategy for the day, picking liquid options, and setting clear goals for the day. This pre-session ritual is important for traders to put together their game plan based on their trading objectives.

2. Choose the Right Strike Price and Expiration

The next step is to choose an appropriate strike price and expiration for the options contracts you’re going to trade. For day traders, it’s best to focus on at-the-money or slightly out-of-the-money options. When choosing an expiration date, it’s best to consider factors like time horizon, market volatility, and time decay.

3. Monitor Real-Time Data

Because good day traders must access the most recent market information to pinpoint the appropriate entry and exit points, it’s key for them to closely monitor real-time data. This refers to actively watching and analyzing the live market data available like volume, market depth, bid/ask spread, and stock prices.

One of the best ways to watch the market closely is to set up multiple charts to get a complete view of the market, use alerts to be notified about specific price levels, and stay updated using news feeds. It’s key to use a good trading platform that offers real-time data monitoring paired with technical indicators that identify trends, trading opportunities, and resistance/support levels.

4. Execute Your Trades

Day traders must analyze technical indicators to determine the right entry point for any given trade. Often, traders must look for a confluence of different factors to confirm an appropriate entry point. Technical indicators that day traders should view include support/resistance levels, moving averages, volume, and candlestick patterns.

5. Set Exit Rules

Next, you must set up the conditions for exiting the trade. This includes setting up targeted profit levels or stop-loss levels. This ensures that you either capture the profit level you’re looking to make with each trade or minimize potential losses by having your trades automatically sell once they lose up to a certain amount of money.

Common Mistakes to Avoid When Day Trading Options

Plenty of day traders have made plenty of mistakes when trading these short-term options contracts. If you’re new to day trading, learn some lessons from the mistakes of other day traders who have gone before you to put yourself in a better position. This part of the guide will focus on the common mistakes to avoid when trading options during the same business day.

• Overtrading Due to Emotional Decisions: Overtrading happens when investors make too many trades within a short period of time, or they use too much money on a single trade. Buying or selling too much can lead to financial losses—these are the result of high transaction costs, which can eat significantly into the trader’s profits. Overtrading can happen when investors get too greedy, overly ambitious, or overconfident in their abilities.
• Ignoring Transaction Costs: Another significant mistake that day traders can make is not factoring transaction costs into their plans. These can add up quickly when performing multiple trades in a single day, and they can take a toll on the profit you make from each transaction. Ignoring transaction costs is a surefire way to keep traders from being profitable in their day-to-day options trading.
• Using Illiquid Options Contracts: Ideally, day traders will want to use liquid options contracts when trading within the confines of a single business day. Liquid options contracts are securities that can be bought and sold easily and quickly. Some day traders make the mistake of buying or selling illiquid options contracts which typically ends in the trader being unable to settle this investment by day’s end.
• Holding Positions Too Long: Some day traders make the mistake of holding their positions too long,g and they end up losing money because they fall victim to time decay. This can result in a reduced profit or even loss on the trader. Some day traders who hold onto options for too long make it so that time decay erodes the potential profit, and this causes them to miss out on a better entry point.
• Failing to Adapt to Market Conditions: Some day, traders go into trading with little understanding of the market, and they don’t have any game plan whatsoever. They aren’t familiar with the trading strategies needed to navigate various market conditions and fail to properly time pivot from one strategy to the next to lock in profits and minimize losses.

Tools and Resources for Successful Day Trading

Now, let’s take a look at the best tools and resources that successful day traders should be using during each of their trading sessions. Find out which are the most effective charting tools for your trading regimen as well as the best brokerage platforms for getting the job done. We also included links to educational resources that can help you learn and apply knowledge in between trading sessions.

Charting Tools

Charting involves the use of technical analysis tools to help identify price patterns, potential turning points, and market trends. A few of the most common charting tools for day traders include the following:

• Moving Averages: This tool helps traders identify trends in price fluctuations. Moving averages smooth out price data over a set period of time. They are calculated by taking the average price of a security over a certain period of time–moving averages are one of the first indicators that day traders add to their charts.
• Support/Resistance Levels: These are price points on a chart where the security is likely to stop or reverse the current trend. The buying pressure is strong enough to prevent further price decline at the “support level,” and the selling pressure is strong enough to prevent further price increases at the “resistance level.”
• Trend Lines: This day trading tool is used to help predict the direction of an option contract’s value as well as identify areas of support or resistance.
• Oscillators: These technical indicators help day traders identify when financial instruments are overbought or oversold. Oscillators form a trend indicator that fluctuates between the two extreme values of the high and low bands. They are used to forecast market trends/prices, pinpoint entry or exit points, and capitalize on price reversals.

Platforms for Technical Analysis

• TradingView
• Thinkorswim
• E*TRADE
• TradeStation
• Webull
• Fidelity

Broker Recommendations

As far as good brokers for day trading go, several recommended platforms come with low fees, fast execution, and advanced trading platforms:

• Robinhood
• Interactive Brokers
• Charles Schwab
• E*TRADE
• Webull
• TradeStation
• eToro
• tastytrade

Education Resources

If you’re new to day trading or you’ve been doing it for a while and simply want to expand your education, there are a bunch of great resources you can take advantage of, including online courses, books, and tutorials. We’ve outlined some of the best below for your convenience.

Courses

• Bear Bull Traders
• Bullish Bears
• Warrior Trading
• Humbled Trader
• Investors Underground

Books

• How to Day Trade: The Plain Truth by Ross Cameron
• Beginner’s Guide to Day Trading Online by Toni Turner
• Day Trading for Dummies by Ann C. Logue
• All About Day Trading by Jake Berstein
• How to Day Trade for a Living: A Beginner’s Guide by Andrew Aziz
• A Complete Day Trading System by Thor Young
• The Art of Short Selling by Kathryn Staley
• Mastering the Trade by John Carter
• The Discipline Trader by Mark Douglas
• How to Day Trade Stocks for Profit by Harvey Walsh
• High Probability Trading by Marcel Link
• Start Day Trading Now by Michael Sincere
• The Truth About Day Trading Stocks by Josh DiPietro
• Charting and Technical Analysis by Fred McAllen

Tutorials

• Day Trading Guide for Getting Started by Warrior Trading
• Day Trading for Dummies: 1-Hour Beginner Course by Udemy
• Day Trading 2024: How to Day Trade (Tutorials and Expert Tips) by DayTrading.com
• Day Trading: Definition, Risks, and How to Start by NerdWallet
• Best Way to Learn Day Trading Stocks for Beginners by WallStreetZen

Risk Management for Day Trading Options

Before we wrap up our guide on day trading, we want to touch briefly on risk management techniques when trading short-term options contracts. Many of these tips can apply to other forms of trading, so they aren’t anything new if you’re already familiar with options trading, but they are reliable risk management tools that are worth reiterating due to their time-tested success.

Importance of Position Sizing

It’s key to never use much more than 1-2% of your entire capital on a single investment. This can lead to overtrading which leaves you susceptible to big losses if the market doesn’t move in your direction. Keeping the allotted capital to a minimum is a great way to minimize the impact of losing trades and helps you diversify your portfolio across multiple asset classes or market sectors.

Risk/Reward Ratios

Day traders should take the time to assess the expected return on a trader per unit of risk. By outlining the profit potential as well as how much they stand to lose if the trade goes south, traders can make firm decisions on whether or not to enter a trade. It’s helpful, especially for day traders who have to properly manage their risk exposure to keep from incurring too much in losses and still realize a profit in a single day.

How to Handle Losing Streaks

The first step for day traders whose plans aren’t going well is to accept their losses. It’s a part of the trading process. Next, it’s important to conduct proper damage control and reduce their risk. Reviewing the current strategy is always a plus—it’s the best way to find out what’s working and what’s not. Good traders will dump strategies that aren’t serving their goals and replace them with something else.

Keeping a trade journal is a good method for recording everything that occurs during trading sessions. Day traders can use this information to find out the strengths and weaknesses of their current approach. Along with learning through keeping a journal, day traders should have a mentor relationship with another trader or two with considerable more experience for continued learning. It also never hurts to network with other peers in the day trading work as a way to discuss current events and keep sharp with the best strategies.

FAQs About Day Trading Options

We covered a lot in this guide, but there are some things we might have missed. We compiled this brief FAQ guide to cover some of these gaps with common questions from our readers and customers about day trading. Hopefully, this will shine a bit of light on some areas of day trading we might not have had time to cover in the guide.

What’s the Minimum Capital Needed to Start Day Trading Options?

Day trading in the United States requires a $25,000 minimum account balance. This is due to day trading falling under the pattern day trader rule, which applies to those who perform four or more day trades within five business days. We would recommend, however, that day traders have anywhere from $30,000 to $50,000 in their accounts to provide an adequate buffer in the event of market downturns. It ensures that there’s always enough money in the account to satisfy the pattern day trader rule.

Can You Day Trade Options with a Small Account?

Smaller accounts in day trading would be right around $25,000 or a bit more, so it’s possible to day trade using a balance this small. However, you run the risk of not satisfying the account balance requirements if your investments aren’t doing well and your balance falls below $25,000. You can get around this by performing less than four-day trades within five business days until you get the account balance back to where it needs to be.

How Do Taxes Work for Day Trading Options?

In day trading, you’re opening and closing positions in a single trading day, so gains are taxed as income, and losses are reported as short-term. The tax on gains is computed using the difference between the asset’s sale price and its acquisition price. These are subject to different rates. The short-term capital losses can be used to offset gains on your tax return with the potential to deduct up to $3,000 of net losses against your ordinary income if you have no other gains to offset them.

What’s the Best Time of Day to Trade Options?

Successful day trading is done when there are big movements in the asset’s price in the shortest amount of time. This typically occurs in the morning between 9:30 and 10:30 EST making this the best time of the trading day to trade options. Day traders typically don’t trade after 11:30 AM because volume and volatility have significantly subsided.

The Key Takeaways of Day Trading

The core parts of day trading that set up investors for success are preparation, strategy, and risk management. These crucial elements help day traders to buy and sell securities easily and quickly while taking advantage of short-term price movements. It’s key for day traders to find out which liquid options contracts have the best entry and exit points to realize a profit and to choose a trading strategy that best fits with the expected market volatility and volume.

Something we’d like to reinforce the importance of continuous learning and discipline in options trading. Keep an open mind regardless of the skill level you’re at, and be open to learning more about day trading. Check out books, tutorials, or courses to learn more. Network with other traders. Have a mentor who can impart wisdom and keep you accountable for your trading goals.

Explore more resources on our site for more information on day trading and holding short-term positions.