Stock options are truly the most versatile financial instruments in the world. Because of its versatility, beginner options traders easily become confused as to how exactly options can be traded, and search endlessly for that one way to make money in options trading consistently.
The truth is, options traders can only be successful in options trading if they trade options using a suitable style. There are 3 distinct options trading styles and we shall be exploring them in this tutorial. Each options trading style differs in time commitment, trading horizon, analytical tools as well as trading intensity. Due to these differences, options traders usually fit in no more than 1 of these styles according to their character and lifestyle.
Once you find an options trading style that is suitable to your character and lifestyle, you would have found for yourself a starting point from which to start a lifetime of continued education and exploration in options trading.
Day trading is the buying and selling of options many times during the day in order to make quick profits within a one day period. Day trading aims to make as much profit as possible during the day and then exit before the market closes, with all the profits for the day.
Day trading was extremely unprofitable in stock trading but has been made profitable through options trading due to the leverage effect offered by
The same 1% move in a stock during the day can result in a profit of as high as 10% when trading options. Hence,
skillful day traders may be able to make as much as 10% profit every day for an enormously large amount of monthly profit.
Day trading is an options trading style that requires some specialized platforms as well; from specialized brokering platforms to specialized software and live streaming data-feed.
First of all, day trading requires your own
online broker account
which you can access and trade personally; you simply cannot call your broker fast enough
to execute the kind of trades needed in day trading. The online broker used for day trading needs to provide
level 2 quotes, ECN and many
more such direct electronic trading systems that provides direct quotes from each individual
market makers in order to obtain the best quotes.
Because so many factors and news can move a stock's price within a day, day trading also demands the most
investment in terms of hardware in order to have multiple monitors monitoring all news and price feeds throughout the day. Sometimes, options
can be bought and then sold in a matter of minutes in day trading. It is impossible to switch between windows on the same computer for information.
Day trading, or sometimes known as active trading, is an extremely time consuming and demanding options trading style. Day trading
is time consuming because you will need to be in front of your computer whole day, every trading day, it is impossible for anyone with a day job to
participate. In fact, even if you do not have a day job, sitting in front of your computer 8 hours a day, every trading day, can be
extremely tedious and tiring. Day trading also demands extremely advanced technical analysis skill and the ability to make analysis and
decisions on the fly when prices are moving. This demands the most discipline and skill from any options trader and is certainly only for the
elite traders of the world. Day trading is also an options trading style that requires a lot of training as day traders not only need to
have great analytical skills and robotic execution ability, day traders also need to learn how to use specialized trading platforms and
tools that other options trading styles do not need.
Day trading can also be extremely risky for the amateur options trader due to 2 main factors; Lack of discipline and high cost of trade.
Amateurs simply do not have the emotional control and iron clad trading discipline of professional options traders. When things heat up,
Amateurs find themselves doing all the wrong things, breaking all the rules and completely spoiling every trade, especially during volatile
market conditions. Unfortunately, volatile market conditions have always been the most profitable conditions for professional day traders.
Watching money go up and down in big waves and bombarded by news every single second result in
one of the most emotionally challenging environments in the world. Because day trading is the options trading style that makes the most
trades on a day to day basis, commissions run extremely high for amateurs who need to pay broker commissions. Trades made need to move
more frequently to result in a profit. This means that amateurs have higher commission costs than professional options traders who need not pay commissions. In fact, many amateur day traders find their trades
unprofitable due to commission costs.
In conclusion, day trading is an options trading style for options traders who have:
1. Time to watch the market whole day long
2. Time to go through long periods of training in all aspects of day trading
3. The money to invest all the hardware needed
4. Iron clad trading discipline which can only come from years of trading experience
5. The capital to sustain heavy initial losses
6. High level of competence, skill and experience with technical analysis
7. The means to trade for very low or no commissions
Options Trading Style 2 : Swing Trading
5 to 30 days
Swing trading is trading short term price swings that commonly last from 5 to 30 days. Stocks tend to have short term explosive momentum in
one direction, known as a swing, before pulling back to more sensible levels. The goal of swing trading is to be ahead of such moves
and to get out of the trade profitably before the swing ends. A good swing typically brings a stock 10% to 20% higher (or lower) and could return a
good 100% to 200% profit in options trading buying the appropriate call or put options.
Swing trading is probably one of the oldest investment method and has existed since the beginning of investment. It is one of the 2 main stream
investment techniques, the other being the good old buy and hold long term investment strategy. The problem faced by buy and hold investors
is that positions need to be held for a significantly long time (5 to 10 years) in order to ride out all the ups and downs for an
aggregate gain. Such a time
span can be extremely long and will not serve short term liquidity needs. In fact, it is impossible to buy and hold sensibly using stock options
only as the farthest term
LEAPS options expire after merely 1 year.
This is where Swing Trading comes in to fill the gap. All long term
trends are made up of countless up and down swings. Swing traders trade upwards swings using
call options and downwards swings using
effectively making money on both directions. The benefits are 2-fold; 1, more trading opportunities than the buy and hold strategy.
2, provides better short term liquidity.
Swing trading is especially suitable for options traders who have day jobs and cannot afford to monitor the market throughout the day.
Once the beginning of a swing is identified, the options are bought and a sensible stop loss order put in place. After that, it is merely a matter
of checking how the positions are doing at the end of each day and deciding if it should be closed by placing an order before market opens the
next day. In fact, swing trading is perfect for anyone who has little time to spare, needs short term liquidity and wants the excitement of watching
how their opinions and predictions work out.
In fact, unknowingly, Swing Trading is also the most common trading method used by any amateur stock and options traders all over the world!
When you think a
stock is going to rise and buy it just to sell it a few days or a couple of weeks later for a quick profit, you are swing trading. In fact,
you might already be a swing trader now yourself!
Swing trading is also extremely suited for options trading as stock options are short term trading instruments.
If a swing of 2 weeks or a month is expected, options that expire 1 or 2 months out will be the perfect choice. The
leverage effect of
options also helps to greatly enhance the profitability of swing trading.
Swing trading is also an options trading style that
does not require the rigors or hardware of day trading. In fact, swing trading can also be conducted successfully using
traditional "call-your-broker" brokerage accounts. Because swing trading expects such a high profit by options trading,
broker commissions are rarely a concern. Swing trading is also a lot less demanding in terms of analytical and executional skills as
you could take your time during off market hours to decide what to do with your positions the next day.
Swing trading for options trading requires good analytical skills with both technical and fundamental analysis. Swing traders are patient
option traders who
wait for the perfect swing to set up before making a move and are disciplined to take profits before each swing ends. Swing traders also
to identify technical patterns and setups in order to time the perfect entry and exit.
Swing trading is such a popular options trading style
now that it has even branched into 2 main styles; Mechanical and Discretionary. Mechanical swing trading uses a framework of fixed rules and
identifies fixed entry and exit points using software in order to remove the involvement of human emotions. Mechanical swing trading is
making a lot of ground and has led to many innovations as it is particularly suited for the emotionally weak beginner options traders. One
such excellent mechanical swing trading system is the
Star Trading System. Discretionary swing trading is the realm of the
professional and veteran options traders who do endless amounts of research and use all their experience, knowledge and skill in order to
trade according to the prevailing conditions. No two trades are alike in discretionary swing trading, and no two have the same reasons for taking a
In conclusion, swing trading is an options trading style for options traders who have:
1. A day job and cannot monitor the market
2. A background in technical and fundamental analysis
3. A need for short term liquidity
4. Little emotional control
5. Do not have a lot of money to trade with
Options Trading Style 3 : Position Trading
1 to 6 months
Position trading is an options trading style unique to options trading. Position trading is the use of options trading strategies in order to
profit from the unique opportunities presented by stock options, such as
volatility and even
arbitrage to make safe, fixed, albeit
lower profit from options trading. Position trading is the realm where extremely professional institutional traders such as Market Makers
The aim of position trading is to profit with as little risk as possible even if it means making much lesser profit than the punters.
This involves complex mathematical calculations and lots of patience to identify the right opportunities. Position trading profits not
only from directional moves on the underlying stock, but also from stocks that are completely stagnant. In fact, most position traders aim to
directional risks from their portfolios and
seek to profit from time decay or, even better, risk-free options arbitrages.
As such positions need to be held all the way to expiration in order to completely unwind and realize their maximum profit potential, the
holding periods are significantly longer than swing trading. It has also been proven that position trading has outperformed the other two
options trading styles during volatile, bearish and uncertain market conditions.
Position trading is an options trading style suitable for investors with very big funds, who cannot afford to take significant risks, and
can live with a low percentage profit on a monthly, quarterly or even annual basis.
Position trading is also the options trading style that demands the most understanding and mastery of stock options as a financial instrument
and its characteristics. Intimate knowledge of the mechanics that drives stock options such as
options greeks as well as the aggregate effects
of combining different option through
synthetic positions is a must for any aspiring position traders. Complete understanding of all the different
and their advantages as well as disadvantages is a must as well. As the returns from position trading can be very small,
low commission brokers and legging should also be used.
In conclusion, position trading is an options trading style for options traders who have:
1. Complete understanding of stock options and all its underlying dynamics
2. Good mathematical and analytical skills
3. Time to completely learn and master options trading
4. Big enough funds to make a significant absolute profit
5. Little appetite for risk
6. No taste for punting
7. Access to low commissions or no commission brokers
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