I received a few smart questions from one of our team members, Javier. The queries surrounded the topic of day trading options, which I initially discussed in my 2018 post titled “How to Day Trade Options.”

Here was Javier’s first question (slightly modified by me):

“One of the things I found strange on your blog is that you do not recommend day trading options spreads. But bull call spreads was the strategy I was using when day trading AMZN, and it seemed to work.”

The first thing I’d reiterate is the account size you need to day trade stocks or options is $25k. As discussed in the original article, if you don’t have an account of that size, then you’re limited to making three day trades over five-days.

That’s an important point. You can’t embark on a quest to day trade if you’re only allowed three trades a week. It’s too restrictive. This threshold doesn’t just apply to bull call spreads. It applies to any stock or options trade.

Now, let’s say you have $25k. Or, that you only make the occasional day trade so the three a week limit doesn’t deter you. There are still reasons why I don’t suggest bull call spreads as your vehicle.

First, as mentioned in the original post, the bid-ask spread for options is wider than that of Forex, futures, or stock. It doesn’t mean you can’t use them. It just means they would be my last choice from a bid-ask spread perspective. The liquidity in the other three is better.

Second, the reason I said I prefer buying calls/puts outright over spreads is that they have a higher delta. Thus, they are a better proxy for stock than a bull call spread. However, in cases of really high-priced stocks like AMZN, I see the need for using bull call spreads. And I have zero problems with that. When I trade stocks like AMZN, TSLA, GOOGL, etc… I’m always using bull call spreads for directional plays. The only difference is I’m usually swing trading.

Here was the next question regarding the bull call spread rules:

“The cost of the trades that I tried broke the “40% of the spread rule” and obviously the “net 25 delta rule” but #1 it had to be done to bring down the cost of the trade and #2 since I’m looking for small returns, I basically pay attention to the risk graph.”

I don’t mind breaking the 40% of spread cost rule if needed keep the risk appropriate. The rule refers to not paying more than $4 for a $10-wide spread or $2 for a $5-wide spread.

Building a bull call spread with a net delta of 25 is really expensive on high-priced stocks. Even in a normal swing trade, I break the rule when building trades on AMZN. So, I understand the need when doing it in your situation. By having a lower net delta, it just makes the position more conservative.

As for paying attention to the risk graph, I’d be focusing more on the stock chart in managing my trade. That’s because the patterns and support/resistance levels that help me time the trade are displayed there. All the risk graph is useful for is telling you the corresponding profit/loss for each price level. If you find that helpful, then great, I just wouldn’t be placing and managing trades solely on the risk graph.

Final question:

“Are there any more articles or videos that you recommend reading/watching?”

If you want to explore how to use futures for day trading, there was a series of Coaches Shows in March of this year from Keith King. Just go to the Coaches Show page and scroll down to March 2020’s episodes. I’d start with the March 10th, 2020 first.

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