Day trading stock options is a concept that combines two strategies that are risky even when done alone. Day trading involves never holding a position for more than one trading day. Day traders generally close all positions before the market closes. Stock options give you the “option” to buy a certain security, but not an obligation. Options are very risky, but have the potential to generate great returns.
- Day trading is generally a one-day activity. The trader studies patterns in the market or charts and determines the best time to buy or sell. Most investors are more familiar with a long-term strategy of “buy and hold.” Day trading is very risky because it forces the trader to be subjected to the intraday fluctuations of the market. Timing a volatile market can be very tricky. A good trader will exploit the market fluctuations and take home a profit.
- The two main types of stock options are “call options” and “put options.” A call option gives you the right, but not the obligation to buy a certain stock, commodity or financial instrument within a given time period. This time period is called the strike date. The agreed-upon price at which you can exercise the option is called the strike price. A put option is the reverse of a call option. It gives you the right to sell an option at a certain price instead of buying it.
- Day trading stock options serves a different function than a standard stock option purchase. Normally, an investor will track the stock option until the strike date and determine the appropriate time to exercise the option. However, day trading does not allow the investor this freedom. With day trading, the strike date is practically irrelevant, since day trading assumes you will not be holding the option for more than one day. Your decisions will be guided by the market fluctuations of the given trading day.
- Consider using one of the popular options strategies used by professionals. The most popular techniques are straddles, butterflies and strangles. The pros use these methods for a reason. Even if you do not employ them yourself, do not enter the options arena until you at least study and understand them.
- Because of the serious risks involved with day trading stock options, it is highly recommended that you consider “practicing” before trading with actual money. Several websites allow you to do fantasy trading. This is trading with theoretical money instead of your own. Do this until you feel confident.