Strategy · Education

Day Trading Weekly Options

Day trading weekly options is an excellent way of implementing the use of weekly options. Due to the short duration of weekly options, they are ideally suited to a style of trading that centers around entering and exiting each trade quickly. Under U.S. margin rules, a “day trade” is defined as the purchase and sale, or the sale and purchase, of the same security on the same day in a margin account.

One of the biggest advantages of day trading weekly options as opposed to day trading monthly options is that the premiums of weekly options are generally lower than their monthly counterparts. The primary reason for this is that there is less time-value built into the costing of a weekly option, and as a day trader does not need extra time, they don’t need to pay the higher premium for a longer period until expiration.

CATALYSTS FOR DAY TRADING WEEKLY OPTIONS

Another reason that weekly options are excellent for day trading is that the criteria considered in selecting a weekly option to trade is the same as the criteria for choosing an option to day trade. In both these trading scenarios, the most important aspect to consider is whether there is valid reason to believe that a stock price and its corresponding option price is likely to move fast and significantly. This anticipated catalyst may include the company reporting earnings, or major financial news, the release of a new product, or changes in the company structure or key personnel.

When day trading weekly options, a trader can enter a trade that is expected to rise dramatically (in the case of a call option), or to drop hard and fast in the case of a put option, and exit the trade immediately after that movement has occurred.

OTHER FACTORS TO CONSIDER

Volatility is a key factor that affects the suitability of an option for day trading. Historical volatility measures the amount of fluctuation in price that a security has previously demonstrated. If a stock is generally fairly slow-moving, even a dramatic catalyst may not cause the price to jump substantially enough to make the option viable for a quick profit. However, the implied volatility, or predicted future volatility, may be higher than the historical volatility, making the option a potentially profitable trade.

Volume is another very important aspect to evaluate when day trading weekly options. Sufficient volume is vital in trading any options, and especially when the goal is to enter and exit the trade within the same trading day. If there is not enough trading volume, then a trader will likely be unable to sell their option contract for the price they want within their time-frame, regardless of the value of the contract.

STRATEGY FOR DAY TRADING WEEKLY OPTIONS

When determining your exit strategy, one of the biggest considerations is your risk tolerance. With our trading alerts, we show 20%, 50% and 100% targets for each position, each measured from the price shown with them. On your own plan, work the same three levels out from the price you paid. These are reference points, not a recommendation to hold for 100%. Your own trading profile and risk tolerance may mean taking the 20% or 50% target, while another trader may choose to hold some or all of the position for 100%.

Once you have sold your position, and exited the trade, there are some further strategies you can apply if you believe that the price has the potential to keep moving in the direction of your choice (up for a call or down for a put). These strategies are based on the price movement at that time.

One possibility is that the price drops back after you have sold your option contract. Some traders buy the same option again if they expect a rebound. The second purchase can also lose its whole premium.

The other situation is that the price continues to move in the direction of the position you have just sold, and because the catalyst is still in place, you are fairly sure that it should continue moving that way. You could then choose to buy another contract with a higher strike price in anticipation of making another profit from the continued movement, while having already secured your initial profit. Experienced traders sometimes enter and exit the same option several times within a single day this way, as long as the catalyst remains in place.

A FINAL WORD ON DAY TRADING WEEKLY OPTIONS

Day trading weekly options can be a fast-paced way to trade stock options if you have the right information, and the ability to make quick and rational trading choices.

However, neither day trading nor trading weekly options is very well suited to a novice trader, and all trading carries risk, including the loss of your entire premium, that a trader must be aware of and willing to accept.