Day trading options can proof to be an affective investment strategy as long as you follow the correct rules and plan each trade out in advance.
This article will provide a step by step example of a method for day trading options.
The strategy.
There are obviously many different strategies to day trading options, and as you trade them you will discover more of it . But out of all the strategies one strategy is employed. This strategy will be based on earnings news from medium sized companies that do not trade heavily in options (nor too lightly).
Selecting the Companies.
. Go through the list of all the companies that will be issuing earning the very next morning look at the earnings calendar in any finance site . Select medium size to large companies that you are familiar with or know to be sound. The key to selecting these companies has more to do with how much volume is seen on their options. If it is too high you don’t want them. You want a volume that keeps the options from trading as fast as stocks. But if the volume is way too low that won’t work either.
Selecting the Options.
Once you have a few companies in mind lookup both in the money long puts and calls. If options expire the same week you are trading select the next months puts and calls. The idea is to find a not too expensive in the money put and call. Write down the symbol names and the closing price. Do this for several companies; about 5 to 10.
Setting up the Trades.
Wake up in the morning an hour before the markets open and look at the earnings news from all the companies you pre-selected from the night before. (Go to yahoo finance and enter the symbol name in and you will get the headline news for that company.) Look for earnings surprises. If the news is inline or close to expectations drop that company and look at the others. A good earnings surprise either from exceeding expectations or missing expectations is what we want.
The exit.
Once you pickup the options or two right when the market opens, the expectation is that the option price will move up relatively soon, right after the market opens. With the right company and options selected it should. (Unless overall market conditions are bad; this is always the risk in trading; don’t make the trade if overall market news is bad in the morning.)
Depending upon the company and the overall market condition, with really good earnings surprises you could play them for several days or at least until the afternoon session. And this is the recommendation: sell before the market closes the same day. There is too much risk letting anything sit overnight. Keep the strategy short term (intra-day).
Set a limit sell price for the put(s) based on how the value is rising during the day. Don’t try to get every last bit of movement out of the option. Take a healthy exit point below what you expect the top to be. Be a bit conservative here. Things usually don’t go as well as we predict them to go.
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