Day options stock trading trading
But day-trading the options is not one of those strategies. Options are simply the wrong tool for that particular job, like trying to cut a board with a tape measure, drive a car to an island or cook a steak in a microwave. The first issue is that of trading liquidity and bid-ask spreads. For almost all options, the bid-ask spreads, as a percentage of their value, are much too wide for day trading purposes, although not a problem for longer duration trades. We enter and exit trades with precision timing as the price of the asset touches small-scale demand and supply zones.
This can be very effective and lucrative, but it requires quick trade entries and exits. When we buy an option, if we want to get it done that quickly we will have to pay the asking price for it. Later, when we sell it, we will have to accept the bid price. When we have the time to wait, we can avoid paying the full spread by using limit orders.
In day trading there is no time for that. That alone pretty much rules out options as a day trading vehicle. Also, the thing that makes options unique is that there are three separate sets of forces acting upon their prices at all times.
Options are often classed as complicated, risky investments, and that puts off many aspiring day traders. However, there are just two main classes of options. Setting aside the two main classes, there is a long list of different markets and options available. Although not all are suitable for day trading, the list includes:. Usually, you will find that most options are based upon shares in publicly listed companies, Twitter and Amazon, for example.
However, there is a growing number of options based on alternative underlying investments. These include day trading options on stock indexes, currencies, commodities, and real estate investment trusts REITs. The exception to this rule is when adjustments take place as a result of stock splits and mergers.
The majority of exchange-traded stock options are American. They can be exercised at any point from the purchase date to expiration. European options, however, you can only redeem on the date of expiration. A lot of people swiftly realise there are numerous similarities between day trading options and futures. They are both usually based on the same underlying instrument. The makeup of the actual contracts also shares numerous similarities.
The difference is how they are traded. With options, you get a broader range of available options. Options can be traded singularly, or you can purchase them alongside stock trades or futures contracts to create a form of insurance on the trade.
There are a number of reasons you can make serious money trading options. Even putting financial remuneration to the side, day trading with options appeals for several attractive reasons.
Intraday options trading is multi-faceted and brings with it great profit potential. The best part though — accessibility. You can start day trading with options from anywhere in the world. All you need is an internet connection. Despite the numerous benefits, there are certain challenges that come with trading in options.
Fortunately, all the obstacles listed below can be overcome. If you take both considerations into account you can adjust your trading plan accordingly. Your broker will help facilitate your traders. Today there are numerous online brokers to choose from. The margin interest rate is usually based on the broker's call. Because of the nature of financial leverage and the rapid returns that are possible, day trading results can range from extremely profitable to extremely unprofitable, and high-risk profile traders can generate either huge percentage returns or huge percentage losses.
Because of the high profits and losses that day trading makes possible, these traders are sometimes portrayed as " bandits " or " gamblers " by other investors. The common use of buying on margin using borrowed funds amplifies gains and losses, such that substantial losses or gains can occur in a very short period of time.
In addition, brokers usually allow bigger margins for day traders. Because of the high risk of margin use, and of other day trading practices, a day trader will often have to exit a losing position very quickly, in order to prevent a greater, unacceptable loss, or even a disastrous loss, much larger than his or her original investment, or even larger than his or her total assets.
Originally, the most important U. A trader would contact a stockbroker, who would relay the order to a specialist on the floor of the NYSE. These specialists would each make markets in only a handful of stocks. The specialist would match the purchaser with another broker's seller; write up physical tickets that, once processed, would effectively transfer the stock; and relay the information back to both brokers.
One of the first steps to make day trading of shares potentially profitable was the change in the commission scheme. In , the United States Securities and Exchange Commission SEC made fixed commission rates illegal, giving rise to discount brokers offering much reduced commission rates. Financial settlement periods used to be much longer: Before the early s at the London Stock Exchange , for example, stock could be paid for up to 10 working days after it was bought, allowing traders to buy or sell shares at the beginning of a settlement period only to sell or buy them before the end of the period hoping for a rise in price.
This activity was identical to modern day trading, but for the longer duration of the settlement period. But today, to reduce market risk, the settlement period is typically two working days. Reducing the settlement period reduces the likelihood of default , but was impossible before the advent of electronic ownership transfer.
The systems by which stocks are traded have also evolved, the second half of the twentieth century having seen the advent of electronic communication networks ECNs.
These are essentially large proprietary computer networks on which brokers could list a certain amount of securities to sell at a certain price the asking price or "ask" or offer to buy a certain amount of securities at a certain price the "bid". The first of these was Instinet or "inet" , which was founded in as a way for major institutions to bypass the increasingly cumbersome and expensive NYSE, also allowing them to trade during hours when the exchanges were closed.
Early ECNs such as Instinet were very unfriendly to small investors, because they tended to give large institutions better prices than were available to the public. This resulted in a fragmented and sometimes illiquid market. The next important step in facilitating day trading was the founding in of NASDAQ —a virtual stock exchange on which orders were transmitted electronically. Moving from paper share certificates and written share registers to "dematerialized" shares, computerized trading and registration required not only extensive changes to legislation but also the development of the necessary technology: These developments heralded the appearance of " market makers ": A market maker has an inventory of stocks to buy and sell, and simultaneously offers to buy and sell the same stock.
Obviously, it will offer to sell stock at a higher price than the price at which it offers to buy. This difference is known as the "spread". The market maker is indifferent as to whether the stock goes up or down, it simply tries to constantly buy for less than it sells.
A persistent trend in one direction will result in a loss for the market maker, but the strategy is overall positive otherwise they would exit the business. Today there are about firms who participate as market makers on ECNs, each generally making a market in four to forty different stocks.
Another reform made was the " Small Order Execution System ", or "SOES", which required market makers to buy or sell, immediately, small orders up to shares at the market maker's listed bid or ask. In the late s, existing ECNs began to offer their services to small investors. New brokerage firms which specialized in serving online traders who wanted to trade on the ECNs emerged.
Archipelago eventually became a stock exchange and in was purchased by the NYSE. Moreover, the trader was able in to buy the stock almost instantly and got it at a cheaper price. ECNs are in constant flux. New ones are formed, while existing ones are bought or merged. As of the end of , the most important ECNs to the individual trader were:. This combination of factors has made day trading in stocks and stock derivatives such as ETFs possible.
The low commission rates allow an individual or small firm to make a large number of trades during a single day. The liquidity and small spreads provided by ECNs allow an individual to make near-instantaneous trades and to get favorable pricing. The ability for individuals to day trade coincided with the extreme bull market in technological issues from to early , known as the Dot-com bubble.
In March, , this bubble burst, and a large number of less-experienced day traders began to lose money as fast, or faster, than they had made during the buying frenzy. The NASDAQ crashed from back to ; many of the less-experienced traders went broke, although obviously it was possible to have made a fortune during that time by shorting or playing on volatility. In parallel to stock trading, starting at the end of the s, a number of new Market Maker firms provided foreign exchange and derivative day trading through new electronic trading platforms.
These allowed day traders to have instant access to decentralised markets such as forex and global markets through derivatives such as contracts for difference. Most of these firms were based in the UK and later in less restrictive jurisdictions, this was in part due to the regulations in the US prohibiting this type of over-the-counter trading. These firms typically provide trading on margin allowing day traders to take large position with relatively small capital, but with the associated increase in risk.
Retail forex trading became a popular way to day trade due to its liquidity and the hour nature of the market. The following are several basic strategies by which day traders attempt to make profits. Besides these, some day traders also use contrarian reverse strategies more commonly seen in algorithmic trading to trade specifically against irrational behavior from day traders using these approaches. It is important for a trader to remain flexible and adjust their techniques to match changing market conditions.