Online option day trading rules
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.
These expectations can and do change from moment to moment. This causes option prices to inflate or deflate, completely separately from the effect of stock price changes. Sometimes the effects of current stock movement on the one hand, and of the expectations of future stock movement on the other hand, both act to push option prices in the same direction. But sometimes they act in opposition. Finally, there is the issue of time decay.
This puts steady pressure on option prices both puts and calls , while not affecting the underlying stock at all. So, even the best analysis of probable stock price movement alone does not give us enough information to trade options effectively, most especially over very short time frames.
We also need to assess market expectations. Are those expectations too high, making options overpriced and therefore a good bet to sell short? Or too low, making the options an especially good buy?
Answering these questions is not especially difficult, and we have great tools to do just that. Your broker will help facilitate your traders. Today there are numerous online brokers to choose from. The challenge is finding one that meets your individual needs. Strategies for day trading options come in all shapes and sizes, some straightforward and some complicated.
Before we look at an example, there are a couple of essential components most strategies will need. Your chart will require the best indicators for trading options.
These vary from strategy to strategy, but they include:. Not just when you enter and exit the trade though, but also when you set up for the trading day ahead. Options strategies that work usually have a trader behind them who is up bright and early.
For example, you may want to be up as early as You can start setting up your trading strategy based on what your market has done throughout the night.
If you know this you can also know if most stocks will open up or down when the US market opens at 9: Day trading on options requires careful analysis and significant time. This is one of the basic options strategies that work. If the market is on the rise you will buy calls or sell puts. Many prefer to sell options than buy them. However, some equities move so well that purchasing the option can yield greater profits than selling the option and waiting for it to go downhill.
Apple is one such example. Now you sit back and wait for half an hour to see if you traded in the right direction. If the market turns then get out. There are plenty more opportunities out there. If the market continues in your direction you could stay with it and place your stop to the other side of the open by around cents. If it continues to look promising you can re-evaluate again at around 3: You can then make a final decision and hopefully count your profits.
Even with nifty options day trading techniques, you can always benefit from invaluable tips. From risk management and stock options tips to education and rules around tax, below you will find top tips that could keep you firmly in the black.
One of the top tips is to immerse yourself in the educational resources around you. The best traders are constantly digesting information. The Jeff Augen day trading options PDF is available for free download and considered one of the most useful resources out there. However, you should also consider the following:. It can be difficult to resist the urge to throw your hat into the ring early on. However, getting to grips with stock options strategies with a demo account first is often a wise decision.
Demo accounts are the ideal place for trial and error. However, whilst pattern day trading does apply to options in the US, many other countries do not have such barriers.
In other countries, you may need to consider taxes. How will your profits be taxed? Will they be considered as personal income, business income, speculative or non-speculative? Your tax obligations can seriously impact your end of day profits. So, find out what type of tax you will have to pay and how much?
This can speed up trading times, plus it can allow you to make far more trades than you could manually. This will help you minimise your losses and ensure you always get another crack at the market. As a day trader, you have two objectives.