Day Trading Options is really attractive for new traders. The leverage and potential gain of yielding over 100% on a play push retail traders to fly into the options market potentially unaware of what they’re getting themselves into. Throughout this post, we are going to talk about the basics of day trading options, and how to relate them to trading the expiration date.
Options have multiple expirations dates, most have a monthly expiration and a lot of weekly expirations. The expiration is the date the options contract expires and the buyer and seller exchange what they had promised before the date. Some options like indices (SPY, QQQ, IWM) have multiple intraweek expirations. Which expire Monday, Wednesday, and Friday.
So what is so attractive about trading an option on expiration day when you can get stuck in a position that expires virtually worthless? The potential gain of course.
Trading an option on its expiration date is really risky and traders need to understand that before getting into positions. Even if the options go in your direction, if you don’t select an option correctly you can lose. Trading Options on their expiration dates are typically called “Lottos” in the options world. Typically we have those days on Fridays since options have weekly expires on Fridays. Hence we call them “Lotto Fridays”
When do Options Expire & What happens?
When you’re trading options you need to understand when they expire and how the Greeks work around those expiries. Trade liquid options and larger names to begin with and you will be able to manage positions better!
Liquid options like AAPL, FB, MSFT, and other large names have weekly expiries. Meaning each Friday those “weekly” options expire. They also have “monthly” expiries which are the third Friday of the month. This is called OPEX. Trading these days can be wild because there is a lot of repositioning.
On the Options expiration date, the Greeks are very important! Two main Greeks to follow or at least understand are Theta and Delta.
Theta is the time decay of an option, meaning an option will decay exponentially faster within the nearest 30-days of expiration. Extremely fast on the actual date of expiration. So the options that become worthless the fastest would be the farthest Out of The Money. Because they have the lowest probability of being profitable/ITM (In the Money) by the time the day is over.
The next Greek (Delta) is the probability that the option will expire ITM! So if you select a far OTM call or put on expiration date then it will most likely eat away at your money for a loss. These have really low Deltas and really low probabilities of being profitable. That means you have to choose an appropriate Delta so that you don’t get killed in your same-day expiry trades. Cheaper options don’t mean that they’re better!
When we trade 0 days to expiry, (0dte) or same-day expiry options I would consider a Delta of 0.30 and higher OR a 30% chance or higher to close ITM. When you are trading options at expiry you want to be in and out fast because the greeks will work against you the longer you stay in a trade.
The real question is what happens when an option expires? People trade 0dte for a few reasons.
- To collect premium
- To get a quick profit on a “gamble”
- To take a contract into expiry
1. Premium collection: On an expiration day when options sellers come into the markets they identify levels where the market will most likely NOT go. On options expiration, if an option closes OTM on the day it will go to $0. That is the risk. For an options seller, they want it to go to $0 because you want to collect the full premium. This can be done by selling puts or calls.
2. Quick Profits: This is what we call a “Lotto” play where you are looking for a burst of energy in one direction or another. These Lotto plays are relatively cheap because the contract will decay fast. So you need a fast move. These are to be played ITM because they will be cheap OR high Delta OTM.
3. Taking a contract to expiry: If you happen to want certain shares at a certain price. Then you want to buy a contract that would expire ITM. So then you would end up buying 100 times the contracts you buy in shares. If you buy calls. Then if you buy puts you would sell the same quantity. Careful I would only sell puts if you have the shares.
Day Trading Options on expiration
When it comes to day trading options on expiry, at TRADEPRO Academy we play “Lottos” Where we look for a stronger move through a resistance or support level. It is similar to day trading options in general but with a riskier twist.
The following are the aspects you need to be aware of:
- Finding a market mover
- Technical Analysis
- Selecting the right options
- Managing Risk
First things first. How do you scan or look for options opportunities to day trade? You can use a scanner. Like “FinViz” or you can do it manually by finding stocks that look like they could have an aggressive move one way or another.
Finding plays with a scanner? TRADEPRO Academy uses the “signal” feature on FinViz. Looking at “Active” and “Top Gainers/Losers”
This is best done at the end of the day for the following day. The image seen above is the “Top Gainers” Signal where we can see that MRNA was a big gainer. Due to being added to the S&P500.
This is what MRNA looked like on the day. Which we traded! 5-min chart below.
Below are the options fills. Traded this name twice. These are the same-day expiry contracts. Jul16 290C. The price was 283.75 when we had our first entry and the 290 calls were OTM but the delta was good that is why they were selected. The contracts cost 2.60 or $260 a contract and took them out at an average of $2.95 a contract. This is because we saw a price struggle. This is a 13% return on the trade and $35/contract gain. It doesn’t seem like much but you have to get in and out of trades quickly on 0dte. The second trade was taken around the same area on the stock itself. However, you can see the options pricing contract was lower. This is because of the greeks! Theta is decaying the worth of the contract. The second trade was bought for around $2.20/contract and taken out on average at $3.20 a contract. A $100 gain per contract and 46% return on the trade. Notice the rest of the day, the contract’s price dies out quickly. While the price remains relatively the same. This is the danger of 0dte.
The second way you can find a contract to trade is through the setup!
The two ways TRADEPRO looks at it is:
- Daily resistance or support being tested.
- A 5-min chart with a clear direction on the previous day. Based on Volume profile.
If you look at a daily chart. You want to find a stock that is pressing support or resistance and has not broken, but may do so the next day.
If you are to look at a 5-min chart. TPA likes to find names that have formed a “P” or “b” volume profile throughout the day for the following day.
For more on Volume profiles check out this video we have on YouTube.
What to look for on the Daily:
I want to find stocks that are pressing a resistance or a support. Meaning an all-time high, yearly high, or some kind of high that had been rejected hard before. OR to the other side. A low that had been rejected before. A range works well too. A break of either end. Watch as price breaks that resistance on a 5-min chart and you will find the opportunity for a good day trade.
If you are looking at a stock on an intraday basis, then you want to look for a stock that ran up or down in the earlier session and then is consolidating until the close.
Here is a bullish example:
This is Microsoft, where we located the “P” shape volume profile where the price is rotating into the end of the session. We want to identify the top of the session or the edge of the volume profile and from there the next day we wait for a break and retest the level for the continued long.
This is an example of NIO where we see a clear base of the volume profile shaping up as a “b” ; we can use this to identify the breakout to the top side or bottom side. Typically the “b” is a continuation of lows. We would wait for the break of the lows and a retest to buy puts for the downside. You can look for the breakout with a tight stop.
After you identify the trades, you do your technical analysis. The next step is to select the right options for a 0dte. This is the trickier part. You want to focus on more liquid options that have smaller spreads so the position doesn’t get destroyed. If an option has a spread of $0.05 and under its considered liquid! There is a large focus on large-cap companies for this trading style.
You then want to make sure that your greeks are in check. A good rule of thumb is finding an option that is around 30-40 Delta minimum!
The final step of the process is to manage risk. These options are going to be risky, 0dte can go down in value very quickly as you saw with the example on MRNA.
When you are day trading options on a normal day, without 0dte you are going to use a stop loss of 30-20% at a time. There isn’t really a need to risk more if you have a few days of time. If the position drops more than 30% on a day trade, you’ve either picked the wrong direction or you’ve gotten in a little late.
When you’re trading 0dte, realistically you’re going to be risking more. This is because the Greeks are exponentially affecting price. So usually traders risk between 50% and even the full position, 100% of the premium. This is why they’re called “lottos” all or nothing type events. On 0dte days, you can trade either direction of the market. If you are directional you are buying to open a trade. So you will need to get a move in your direction.
If you are directionless and you want to sell premium to collect at the end of the day then you sell to open. To close the position you will buy to close. In this circumstance, you will want the price to expire away from the strike. Under the calls or above the puts. Depending on which you select.
When you manage trades, make sure you know how much you’re risking! Always stay diligent and manage your risk before you look for profits.
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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.