Option Traders Blog - Can You Make Money Day Trading Options?
Option Traders Blog
Ten years ago it was almost impossible to sit in a cafe or attend a party without overhearing a conversation in which a couple of guys were bragging about all the money they were making day trading the market. If one of the guys was a REAL winner, he was talking about all the cash he was raking in by day trading options. It seemed every day a new millionaire was popping champagne corks. Option Traders Blog
Then the market crashed and most of these geniuses lost their shirts. The easy money had dried up, and the stories about financial conquest dried up, too. Is it still possible for anyone to make money day trading options, or are those days long gone?
It IS still possible to make money day trading, but it is certainly more difficult than it used to be when trading stocks and even more so for options. Why so much more difficult when trading options? There are multiple reasons, but here are three big ones: a preference for bullish positions held by most traders, smaller moves in underlying stocks, and fewer boldly trending days in the markets than we saw in the late 1990s. Let's take a look at each of these:
1. A bullish bias. This preference in traders is a real puzzle. Being an investor is one thing (though a much rarer thing than is generally supposed) and in that case a bullish bias is natural. But if your explicit goal is to simply reap money from the market as prices move, direction makes no difference - ESPECIALLY when you are using options. By their very nature, we can take positions (call or put) which offer profit potential regardless of the underlying's movement. Not recognizing that is a huge blunder: watch your own trading decisions to see if you detect this bias.
2. Smaller moves in the markets. Day traders who focus on stocks (and have sufficient capital to work with) can make money when their trading vehicles move just a few pennies. But because options on stocks move less than their underlying AND because they often have a much wider bid/ask spread, moves of this size don't help the options day trader. Slippage will simply bleed away much potential profit.
3. Fewer trending days. Related to the second road block to trading success, and exacerbated by lower trading volume in options, trying to reap profit from this market without a strong trend being in place is tricky. It's not impossible - a sophisticated range trading strategy can make it doable if there is sufficient up and down movement - but it is significantly more difficult without a strong trend through the day. Option Traders Blog
Obviously, until the markets go through another crazed bubble like the late nineties (and someday they will), retail options traders aren't going to simply fall into piles of money. But there remain opportunities to profit if you have a couple of things:
1. Make sure you've spent the time needed to learn options trading in general. Option prices do not exactly mimic the price movement of the underlying vehicle (stock, ETF, etc.), and if you don't have a handle on this specific market - how the Greeks affect price, how volatility impacts price action - you will be surprised at exactly the wrong time. This is not a maybe, this is a guarantee.
2. Make sure you have an option trading system geared to both sides of the market (bullish and bearish). One thing you will find is that there is often more money to be made in a down draft than an upswing. Be as prepared to buy and sell puts as calls.
3. All the normal considerations around having and keeping a full blown trading plan remain in place. Trading without a complete plan, which includes money management, trading system, and having the right broker for your trading style is a deadly mistake. Don't make it.
4. Capital requirements. The SEC has rules in place requiring brokers to flag frequent stock traders (defined as placing more than three round trip day trades in any rolling four day period) as pattern day traders, and to freeze the accounts of any such trader who has less than $25, 000 in their account. The same rule applies to options traders, so if you don't want you money frozen for months, make sure you have enough capital in place to stay clear of the regulators.
The bottom line here is that it does remain possible to bring money home from the options market by day trading, but it is harder than it used to be. Feel free to explore this potentially lucrative avenue, but do so with caution. Option Traders Blog
Always dream of being Rich? Never able to make a Consistent Profit through trading?
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