DAY TRADING AND OPTIONS

Day Trading and Day Traders

Traders who participate in day trading are called day traders. Day trading is speculation in securities, specifically buying and selling financial instruments within the same trading day.

Different Types of Option Trading Strategies

Building Blocks

There are only two types of options – calls and puts. Calls and Puts form the basic building blocks of all variations of option trading. One option unit is equivalent to 100 units of the underlying stock.

Every trade is built using only calls, only puts, or a combination of the two. Every call or put must have a seller and a buyer.

  • Call Option SELLERS have OBLIGATIONS; e., obligation to sell
  • Call Option BUYERS have RIGHTS; e., right to buy
  • Put Option SELLERS have OBLIGATION to Buy
  • Put Option BUYERS have RIGHT to sell

If You Are SELLING Options

You absolutely must understand the concept of Time Value and Time Decay. Knowing about Volatility (in general) helps because high volatility stocks give better option premiums and therefore better profits (and slightly higher risk).

Focus on four types of option selling:

  • Credit Spreads (Bull Put Spread and Bear Call Spread)
  • Naked Puts
  • Iron Condors – a potentially really profitable way of selling combinations of credit spreads.
  • Covered Calls

If you are BUYING options:

Buying Calls and Puts is a wonderful way of making huge profits with small amounts of money. It is to watch a trade double…then triple…and sometimes even quadruple….all within a few days or even hours.

The Advantages of Buying Options

When buying options, you make full use of leverage to capitalise on a move in a stock. Instead of purchasing the stock for a large amount of money, you can acquire the rights to the same amount stock for a fraction of the cost.

The profit potential for options is unlimited.The loss potential is limited only to the amount of money that you put into a particular trade.

You need to understand FOUR important terms, namely:

  • Intrinsic Value
  • Time Value
  • Delta
  • Volatility.

The price of any option (call or put) has two components:

  • Intrinsic Value: Intrinsic value reflects the amount, if any, by which an option is In-the-money (ITM). It describes by how much the stock price is more than the strike price in the case of calls, or how much lesser than strike price in the case of puts.
  • Time Value: Time Value is the amount of money you pay for the length of time until the option expires.
  • Time Decay so that you give your option enough time to move, but also to understand that as long as you hold on to that option, Time is eating away at your profits.
  • Volatility (measured by VEGA and ZETA) helps you find a good entry point so that you buy options that are cheap or at fair value, and sell when they are expensive.

Understanding these basic terms and their relation to your options is important for you to make a profit in your day trading.

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