Day trading options is one way to take advantage of minimal moves in an underlying stock price. Based on the nature of options, they can provide a much greater return than day trading stocks. Adding options to your day trading portfolio also comes with increased risks compared to buying and selling stocks. Here are some tips to get you started with developing a day trading options strategy.
Find a free stock screening tool that you can use to identify securities you are interested in day trading options against. This is no different than screening stocks to day trade. Options contracts follow the underlying stock up and down but increase and decrease at a higher rate than stocks.
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Open an account with an online discount broker if you plan on day trading options. Since you will be buying and selling options frequently during the day, you want to be sure to have reasonable commission charges to maximize your returns. Online brokers typically charge under $10 per trade which is not bad compared to traditional brokerage fees.
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Create a plan and set of guidelines to follow when day trading options. It is extremely important to follow rules and guidelines that you have established before you make your first trade. For example, knowing when to take a loss and get out of a trade will let you place a stop loss trade with your online broker to minimize your losses.
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Close all transactions before trading stops for the day. One of the first rules day traders should follow is to close out their positions at the end of the day, even if they are at a loss. If the goal is to take advantage of daily stock moves - you want to be sure to minimize your risks of a market that gaps up or down the following trading day.
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Define a solid exit strategy for maximizing your gains and follow it. Similar to knowing when to minimize your losses, if you are day trading options for a living, it is important to capitalize on a trade and take your profits. Don't get greedy and try to let it run higher.
Tips & Warnings
Continuously refine your day trading options strategy to learn from your mistakes and capitalize on what worked best.
Day trading options is very risky and you need to educate yourself before throwing any of your money away.
