Stocks & Commodities V. 31:10 (42-43): Explore Your Options by Tom Gentile
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Explore Your Options by Tom Gentile
CAN OPTIONS BE DAYTRADED?
Here’s a question I get asked from time to time when I’m circling the globe to speak at events: Can options be daytraded for profit? In the past, I would have answered, not unless you want to give your money away over time. In the last year, however, I have changed my tune, researching and even trading options inside of a day. I now answer with a yes, but answering this question thoroughly takes more than a one-word response.
Let’s get one thing straight right now: There is no 100% winning system. I know; I have spent over half my adult life trying to find it, and I have accepted that no matter whether you are a technical or fundamental trader, it’s not out there. If it is, it’s probably illegal. Now that we’ve got that out of the way, let’s consider that with any option strategy, there is a directional (or nondirectional) approach that a trader has to make. I have a three-step process. Spotting the opportunity is first, and it’s not much different for short- or long-term trades. If you’re technical, a chart is a chart — it’s just that short-term traders have no room for distractions. If you’re considering a directional trade, what type of rulebased system will you use to trade? In short-term trading or daytrading, I use a system based on a breakout of resistance levels (or a breakdown from support levels) with a few other indicators that I mix in to determine the likelihood that a stock will rise or fall during the day. The example in Figure 1 uses Apple (AAPL) on August 9, 2013.
As you can see from the chart, this was a snoozer of a Friday. Fridays are often snoozers, due to the lack of government reports, though sometimes traders will push the markets one way or another either to get out of or to hedge positions ahead of the weekend. Taking a short position on 100 shares of AAPL for the better part of the day would have cost between $10,000–45,500, depending on the margin requirement at your brokerage. Nevertheless, an $85 profit (the amount the stock moved in your favor) for the day isn’t much when it comes to return on investment (ROI) on this trade. Could there have been another way to make this paltry amount without putting up the cost?
CAN OPTIONS BE DAYTRADED?
Here’s a question I get asked from time to time when I’m circling the globe to speak at events: Can options be daytraded for profit? In the past, I would have answered, not unless you want to give your money away over time. In the last year, however, I have changed my tune, researching and even trading options inside of a day. I now answer with a yes, but answering this question thoroughly takes more than a one-word response.
Let’s get one thing straight right now: There is no 100% winning system. I know; I have spent over half my adult life trying to find it, and I have accepted that no matter whether you are a technical or fundamental trader, it’s not out there. If it is, it’s probably illegal. Now that we’ve got that out of the way, let’s consider that with any option strategy, there is a directional (or nondirectional) approach that a trader has to make. I have a three-step process. Spotting the opportunity is first, and it’s not much different for short- or long-term trades. If you’re technical, a chart is a chart — it’s just that short-term traders have no room for distractions. If you’re considering a directional trade, what type of rulebased system will you use to trade? In short-term trading or daytrading, I use a system based on a breakout of resistance levels (or a breakdown from support levels) with a few other indicators that I mix in to determine the likelihood that a stock will rise or fall during the day. The example in Figure 1 uses Apple (AAPL) on August 9, 2013.
As you can see from the chart, this was a snoozer of a Friday. Fridays are often snoozers, due to the lack of government reports, though sometimes traders will push the markets one way or another either to get out of or to hedge positions ahead of the weekend. Taking a short position on 100 shares of AAPL for the better part of the day would have cost between $10,000–45,500, depending on the margin requirement at your brokerage. Nevertheless, an $85 profit (the amount the stock moved in your favor) for the day isn’t much when it comes to return on investment (ROI) on this trade. Could there have been another way to make this paltry amount without putting up the cost?
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