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.
|1 to 8 hours
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 stock options. 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.
|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 put options, 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 use charting software 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 position.
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
|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 completely hedge away 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 options strategies 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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