Swing Trading: Options Strategy

What is swing trading and what are options?

Lets begin with the basics, swing trading involves being active in financial markets on a shorter term to medium term basis. Often a swing trader is in a position for at least a few days time, to take them out of the classification of “Day trader”. Which by default would suggest that a Day trader is in and out of a position within a days time. A swing trader would also be in a position for less than a year, which is a loose threshold for an “investor”.

Options on the other hand are a derivative financial instrument, derived from stocks, or other equities, such as indices. An option gives the buyer the OPTION to buy or sell the underlying stock for a predetermined price. While the seller of the option must oblige if the buyer has exercised his option. There are two basic types of options, calls and puts. For more information check out our Swing Trader Course.

Swing trading options is a very popular trading strategy. Options offer a lot of leverage to trading stocks and do not require much maintenance or analysis.

Swing Trading: Options Analysis

The beautiful part about swing trading options is that you do not need exact order flow data to successfully trade. Options analysis relies on technicals and price action which can be done on basic platforms like Trading View.

Swing trading options requires a larger time frame, and rarely an intraday time frame.

Technical analysis can be done with minimal tools, even just with pure price action, higher highs, higher lows, break out and retest for example!

Take a look at the example below.

This is a daily candle stick chart on a gold ETF, GLD. I have outlined two key levels in which we looked only at previous price action. Once you have found a clear trend (up trend). The next step is to look for broken resistance and volume to accompany the break. In which you then look for a retrace in the newly formed support for a press higher.

Once the technical analysis is done, the next step is opening up your options trading platform and looking at feasible options chains. This is where things get complicated. (Later outlined)

GLD on Trading View.

In doing technical analysis on stocks, ETFs or indices, one can also use indicators and other studies to support their analysis.

Take the example below, combined with volume, the indicators used have found viable options ideas. The same chart analyzed different, but the same outcome.

Indicator Analysis

The chart has been divided in four sections and it is color based on those sections. The combination of the four sections outlines the same outcome as that of the price action analysis.

The first being a Fibonacci confluence area marked in neon green rectangles. The combined close levels on the Fib retracement outlines strong resistance levels that would be turned into support if broken. Which are near the same levels as the boxes drawn above.

The second portion is a bollinger band indicator that shows a “squeeze” right at the same Fib retrace levels. This is marked by the purple ovals.

The orange boxes at the bottom right represents the 100 and 200-day moving average resistance levels. They were broken and turned into support levels at which price bounced off and moved higher. This adds validity to the previous two studies.

Finally, the blue lines at the bottom left of the picture. They represent increasing momentum on the RSI, MAC and Momentum. All which support the upside.

GLD Indicator Analysis

Swing Trading: Different Options Strategies

There are so many different options techniques but we can simplify them by categorizing them into two basic categories: directional and non-directional.

Under the direction strategies, we have flat out calls or puts and debit spreads.

Under the non-directional strategies we have credit spreads and strangles/straddles.

Direction Options Strategies

The most common way to trade options is a call or a put. This direction play involves doing ones analysis and deciding the direction of the underlying. Buying a call would suggest you expect the underlying assets price to increase. Buying a put would suggest you expect the underlying assets price to decrease.

Alternatively, if a trader sold a call, they would expect the stock’s price to decline to collect premium. This strategy is not advised, as the risk is unlimited. The same goes for selling a put. The trade expects the stocks price to increase so they collect the put’s premium. The risk again is between the stocks price and $0, because that is the farther a stock can drop.

Combination plays

Another direction strategy that minimizes premium cost but also limits potential gains is the debit spread. This strategy works well in slow moving markets. For example, if there is a clear direction in a stocks price movement but the speed at which it moves in that direction is slow the debit spread would work wonderfully. The not outright direction strategy.

The debit spread involves buying an option and selling the same type of option. For example, if a trader is bullish on Apple but not outright bullish they would buy a call to capture the upside but minimize the premium paid by selling a call a few dollars higher. The premium collected from the higher call offsets some of the premium paid for the lower call. This is called a bull call debit spread.

Bull Call on SPY

The same goes for the put debit spread, commonly known as the bear put spread. Buying an in the money or at the money put while selling an out of the money put to minimize the premium paid.

Non-Direction Options Strategies

Non-direction trading strategies also involve the combination of puts and calls in different ways.

The credit spread is the most popular non-directional options strategy. Best used in slow markets, such as summer markets. There are two credit spreads, the bull put and bear call credit spreads.

The bull put credit spread involves selling a put option for a set premium and buying a put at a lower strike for less premium than the short put. This generates net profit and caps risk instead of selling naked puts. The risk is capped at the difference in strikes less the premium.

The bear call credit spread involves two call options. Selling a call to generate premium and buying a call at a higher strike to generate net credit premium. Again risk is capped as it is in the bull put.

Bear Call on SPY.

A combination of the two credit spreads creates another non-directional options combo. The iron condor. This involves a bull put and a bear call sandwiching price in between. The beauty of the iron condor is that you cannot lose both legs of the position at the same time.

Iron Condor on SPY.

Volatility Combination

Finally, the volatility-based, non-directional strategy, straddles and strangles. This is an earnings strategy to take advantage of volatility leading up to the earnings report. Stocks are usually volatile leading up to their earnings report due to the uncertainty.

The strangle involves a long put and long call at two different strikes. While the straddle involves a long put and long call at the same strike.

SPY Strangle.

The idea behind these two combinations is that the premium of the options would increase on the put and call side as volatility increases. The best case scenario the price of the stock stays stable as volatility increases. But if the stock rises or falls one leg will offset the losses of the other.

For more info on all the options trading strategies listed above, check out our Swing Trading options course. Where the TRADEPRO’s cover it all in great detail.

Swing Trading: Execution and management

There are many platforms one can use when trading options, however, TRADEPRO’s favorite is Interactive Brokers. They have all that is needed in an options chain and more.

When executing an options trade, one has to consider the risk associated with the position before anything else. Then the potential profits and the probability of said profits or losses. There is a great tool within Interactive Brokers that gauges that probability.

When trading, limit orders, and contingencies are very important. Even a bracket order would be wise in a swing position. Meaning a predetermined stop loss level and profit taking level.

Final Thoughts

There are many options strategies that one can take advantage of. Swing trading options can be a very lucrative passive income strategy for all traders.

Just because you are a day trader or investor, that does not mean that you should completely disregard medium term swing trading and options are a great opportunity to do just that!

The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.