Swing Trading is a trading style a lot of traders adopt, there is more of a calming sense of trading and risk acceptance when looking for longer moves. Momentum swing trading options are a practice that eludes a lot of traders due to complexity and timing. It is not as complicated as you may think. Throughout this blog, we are going to outline all of the aspects of momentum trading and swing trading options and how we can combine them for RESULTS.
This is one of the most sought-after trading styles, momentum trading. Momentum trading should be learned by all traders, whether you day trade, swing trade, or even invest. It is the act of finding running stocks that are exploding on some kind of news or event type, which could be as simple as large buy orders. Then taking profits when that momentum evaporates. Think of a missile shot directly into the air, at some point gravity will take over and we capitulate, turning around.
In trading, it works really well, because typically a stock has momentum for a shorter period of time before capitulating. You want to find those uptrend opportunities more so than a downtrend. Grab the news and ride it out.
Typically momentum trading involves a breakout trade in which you are looking for a move through a top (all-time highs) or other recent highs, this is typically a “buy stop run”.
Here is an example of Donald Trump’s SPAC DWAC, a huge hype play. We played it on a day trade basis. We identified the area of interest pre-market as a break above 11.80.
Oct 21, 2021Posted in our Stock Trading Room at TRADEPRO Academy.
The breakout level was given at 11.80 per share. Which then ran 100% and more into 25/share. This was a day trade momentum play. The chart shows a 5-min intraday move.
Momentum trading can be done on a larger scale as well. This is what we are going to focus on throughout this blog. Take a look at the example below on NET, this is a daily chart. When stocks break an ATH (all-time high) there is usually an extended move to the upside. In this case, the momentum really took over.
Before we deep dive into everything that is Momentum swing trading, we have to break each part down bit by bit.
Swing trading involves the process of holding a position in the stock market for more than a single day. Even if you hold the position for 2 days, I would consider it a swing trade. Usually, swing traders are described as multi-week holds in a position where we could see the momentum continue.
A swing trader has many risks, just like a day trader. The risk of holding overnight is great, the stock that you’re holding could decide enough momentum, time to turn around, then proceed to drop. On the other hand, a lot of the moves do happen overnight and we can get those incredible GAPS that turn your positions into multiple hundreds of percent winners on investment.
There are a lot of swing trading styles, which are based on the following mainly:
- Technical breakouts or pullbacks
- Order Flow
In our case, we mainly focus on the technical aspect of swing trading with some order flow (options and share accumulation). We would like to find stocks that have strong paths of momentum rather than thinking “this is a good company” from a fundamental standpoint.
Let’s focus on the breakouts because that is the momentum play. A trader must always consider the risk of their position. If they are taking on more risk than they should then they’re swings, in the long run, are not going to be profitable. You need to know where you are out in case the position reverses, are you going to be stopped out before the real move? Or is your stop too tight?
Usually, if you use a stop based on the underlying position you will have a wider stop and this may interfere with your options pricing.
Speaking of options when swing trading, things get a lot more complicated. Options prices are not as black and white as the equity price. For example if a stock that trades at $100 goes to $106 you know that there is a 6% increase in the underlying. You know how much you gain and how much you could lose. It’s simple. You throw options in the midst and then your gain and loss is subject to variables like the greeks. When it comes to Options there are a few MAIN things you need to know. The strike and the expiration. If you understand how these two variables work you are off to a good start…. There is a lot more than that to it though.
- What price you expect the underlying to be by expiry
- OTM (Out the money) Farther down the options chain and away from the current price
- ATM (At the money) Options contract priced right at the underlying
- ITM (In the money) Options contract priced better than the underlying (below the calls) If the stock is $100, the ITM would be any strike under 100
The strike prices go from ITM to OTM in terms of MOST expensive to least expensive. Meaning there is a higher probability that the stock is above the ITM calls into expiry right? The further OTM you get the cheaper and closer the options are to 0, meaning they’re more of a gamble.
Then you have the expiration:
- Weeklies: Each Friday of the week the options expire
- Monthly: Each Third Friday of the month these options expire
- Quarterly: Each Third Friday of the quarter these options expire.
The further the options expire the more the option will cost because you are buying TIME. So an option that expires in 3 months will be more expensive than an option that expires in a week.
Options Swing Trading
When traders swing trade options they have to be aware of the above, the time to expiry, and the strike to start off with. There are other variables like the Greeks as well as the open interest and the volume of the options.
When we swing trade options, we do not trade weeklies. We look for more time. The expected time for the move naturally, meaning if we expect the move to occur in the same week, then we would buy that week plus 1-2 more weeks of a time cushion. This is because there is a pesky Greek called Theta. This burns the value of the option as the time value starts to wither. Meaning the closer we get to expiry and the farther the option’s strike is from the underlying (OTM) the more the theta will burn the position.
That means there are a few things to consider when swing trading options:
- Are you buying enough time? If you are doing a 1-2 day swing, buy 15-21 days of time,
- Are you selecting the right options (typically a delta of 30 and more is good for a swing)
- Are you selecting the right options in terms of liquidity, if you find strikes with high OI you have a better chance of finding liquidity.
Trading Examples that the TRADEPRO Community took as Swings.
Let’s put it all together!
We want to show you a few examples of some amazing swing trades we have had over the last (recent bit)
We’ll go through 3 total examples. NIO, COIN & NFLX
First NIO, this is a play that we mentioned in our Discord chat. It’s a demand zone support play.
This was less of a momentum play when first entered, however, the higher probability trade would have been to wait for that momentum move to occur.
The idea was generated on Oct 6th. For a Dec17 45C on NIO while the contracts were worth $70/contract.
The green arrow on the daily represents the entry idea based on the demand zone we had in mind, we wanted to risk 40% of the position or the move under 32 on the underlying. We chose OTM calls because we had a lot of time until expiry.
The yellow arrow is the momentum entry where we would wait for the pattern break to start and would get into the position.
This position ran over 100%. In a matter of weeks, we held the majority into Oct20th, which tagged $40/share. A $7 move with $5 more to go until the contracts are ITM.
The next two trade ideas we had in our options newsletter that we sent out, were uploaded to the market research center.
COIN (Coinbase) was shaping up as one of the strongest momentum shifts in price to the upside. We love patterns like this where we could see price breaking through a key resistance that has failed time and time again.
This is our Newsletter Entry. On October 16th before the market opened for the week. We wanted to see the price break above 282 and run, the 300C for Oct29th were priced at 6.00 at the time of entry. They managed to run to 19.70.
This 230% gain on investment was an outstanding breakout momentum play. Which was pent up by all the failures at the level we had outlined. You can see where the volume profile rejects as well. Through that node, there is potential for an upswing.
The image below represents the aftermath of the breakout and we outlined the TOP of the momentum move. After days of the movement, there is no need to be greedy, if anything you need to trim your position when you have profit.
The final trade idea we had was again from our newsletter. NFLX for a strong breakout out of highs, The ATH breakout is an amazing strategy that everyone should be familiar with.
This trade idea was published the first week of December, with the idea of a 2-week swing (Oct15) to get the price to break 620, and into 640. We looked for the 640C which was 4.50 per contract.
Those calls went 200%, and the price moved to 640 by the first week of October. So what was it that made us look at this?
- NFLX had made an all-time high, then rejected it
- NFLX had created somewhat of a bowl pattern and moved back towards that high
- The break of a high that had been formed would be a great mover.
- The options chosen were based on the potential target of the move along with a delta of 30+.
Yes, there was a risk taken on the trade, but if you had a stop that was hovering around 40-50% you would have had the chance to stay in for the real move. If that was of concern, the answer is to look to buy more time. If you had selected Oct22nd which gives you 3 weeks of time and took the 640. The options would have cost 12.75/contract and ran to 30/contract before pulling back to breakeven. This is a 135% move which is less of a gain than the original contract. The close the expiry the higher the potential gain on moves like this.
If you want to learn more about trading options like this, All of the information is in our community and courses. Head on over and take a look! You can find a lot of information on our social media as well!
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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 for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.