Last update: July 2021

Day trading options. The phrase is filled with promise yet potential ruin.

The promise is for profits if your skills prove worthy. As for the ruin, well, that comes unbidden if said skills are found wanting. Let’s see if we can’t shed some light on the topic and help you make better decisions on whether this is a trading approach that speaks to you.

First, the definition of a day trade has to do with the duration of the position. If you buy and then sell a stock within the same trading session, then it’s a day trade. And, of course, the same definition applies if you’re buying an options contract. Since options only trade between 9:30 AM and 4:00 PM EST, that means you’re in and out within 6.5 hours. Sometimes the hold time will be minutes, and sometimes it will be hours. But it won’t ever be days. Holding overnight simply isn’t something that day traders do.

If day trading is your game, then the next step is to decide what vehicle you will use to place your bets. The appeal of options, I suspect, is their cheapness and leverage. If you lack a large account or merely don’t want to tie up the capital necessary for stock, then you might prefer wielding options. Here are a few key points.

Pattern Day Trader

As far as I’m aware, options still subject you to the pattern day trader rule which states that you can’t do any more than three-day trades within five business days. If you execute four or more trades, then you fall under the rule’s requirements which state that you have to have $25k equity in your account. That essentially means that it is challenging for anyone to become a day trader with stocks and options if they are underfunded.

Alternatives do exist, however. This rule doesn’t apply to futures and Forex trading.

Volatility

Volatility is the lifeblood of day trading. More movement equates to a higher potential for profit. No movement equals no potential for profit. This is why day traders thrive on volatility and avoid trading boring stocks like utilities and staples. Furthermore, every penny matters to a day trader. Since their time frame is so much smaller, they’re playing for dimes, quarters, and maybe the occasional buck. But that doesn’t mean we’re talking small money here. Remember, you can amp up your size to make a 25 cent profit come out to hundreds of dollars.

Trading Costs

All tradable instruments involve a trading cost. And I’m not talking about commission. Instead, this consists of the bid/ask spread. This piece is the Achilles heel for using options as your vehicle. Their trading cost is more significant than stock, futures, and forex. And that makes them one of the least desirable instruments to use – at least for day trading.

Here’s an example. Right now shares of Apple Inc have a bid/ask spread of one penny ($185.20 x $185.21). In contrast, the one-month at-the-money call option has a bid/ask spread of ten cents ($4.75 x $4.85). That’s ten times as much! Now, sure you can split the spread to narrow that down. But even still, it will require a larger increase in the underlying stock to offset the spread if you’re using options instead of stock.

And since we’re only gaming for smaller moves in the stock anyways due to our short hold time, it makes options a less effective vehicle for gaming direction.

Here’s another point. You have to stick to liquid stocks. Apple is one of the most actively traded companies in the marketplace and its bid/ask spread for options was still five times larger than the shares. It’s even worse if you venture into illiquid names. So don’t!

Delta Matters

Perhaps this goes without saying, but option spreads are not designed for day trading. So you’re relegated to buying calls when bullish and puts when bearish. That’s it. Now, that should make sense when you consider that you’re using these as a substitute for long/short stock. Think of it this way. If you buy 100 shares of AAPL, your delta is +100. That means you make $100 per $1 increase. If you want to use an option as a substitute, then you have to buy a higher delta option. This is why you must purchase in-the-money calls/puts for your day trades. Otherwise, they won’t be responsive enough to the stock to generate a decent return for the small move you’re trying to exploit.

I’d caution you from going too deep in-the-money though. The bid/ask spreads widen the deeper in-the-money you go.

Let’s summarize:

1. First, options aren’t the most efficient vehicle for day trading.
2. Second, stick with buying calls and puts, not spreads.
3. Third, you have to use liquid stocks that have adequate volatility.
4. Fourth, buy in-the-money options.

Financial freedom is a journey

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.