I'm interested in doing some short-term trading, holding positions for just a few minutes, perhaps an hour. I've seen videos of daytraders doing this with equities. My account is very small though, so for now I think I will be looking for daytrade candidate charts, but buying calls/puts on the symbols instead of stocks. As long as the IV is relatively low, is this a good idea?
iff u dont have a margin account, u will only be able to do one trade a day or something. look up pattern day trader rules. options will give u the chance to trade expensive stuff like google. also the leverage that u dont have in stocks. trading 20 contracts catching 20 cents is 400 or minus that. low volatility is a losing idea for options. they will just lose money. the emini futures is what small accounts do. no daytrading rules, trade as mich as u want. its also harder to close a position with options. the volume has to be very high, like the spy/qqqq
I'm in canada so I dont have the PDT rule. So it sounds like options are a good way to daytrade, at least, superior to equities. But you think the e-minis are even better.. With 1-5k, do you think e-minis are a better alternative than options? One thing I want to do is look at the e-mini/spy/qqqq trend, and buy options on individual stocks to try and catch a stronger trend. In other words, the indecies rarely move more than 2% per day, but if I can find a good individual stock candidate and buy options on that, I should be able to get better returns? Or is e-mini's really the only thing to do?
LOL. And I've seen commercials where every day people get rich flipping houses. I wonder if they're going to add a sub prime mortgage/housing price crisis version? In order to day trade, you need an edge (timing, direction). In order to day trade options, you need a bigger edge in order to compensate for the larger slippage (wider spreads, etc.) as well as the usually lower delta. If you're right, the leverage of options will offset that. But since leverage is a double edged sword, if you're not right, look out below! Low IV is relatively fairly significant for day traders (as is time decay). It's a factor but far, far less than getting the direction right. You can trade options with any IV as long as you get a few points on the underlying and you don't get caught in an IV crunch (earnings, special news, etc.) FWIW, I'd suggest trading stocks with a low commission broker until you can overcome the obstacles of option trading. It's cleaner.
Getting a margin account requires checking a box on an application. And even with that, the pattern day trading (PDT) problem isn't resolved. You're defined as a PDT if you execute 4 or more round-trip day trades (including options) within any 5 successive business days and that number represents more than 6% of the total number of trades made for that five business day period. The only requirement of a PDT is having a minimum of $25,000 of margin in your account. In return, you can carry 4 times margin intraday. But there's no limit on the number of trades intraday.
I have taught several beginning traders how to survive the learning curve of trading using options and a small account. You must strictly follow to these rules: 1: Keep your small trading account a "Cash Account." "Do not" get a Margin Account with a small account! If you have a Margin Account, you will then be subject to the daytrading rule of being shutdown if you make 3 day trades in a week. 2: Use front month SPY options in the 1.35 to 1.85 cost range that have high trading volume (10,000 to 30,000). They will usually have a .01 bid to ask spread (that's important). 3: For scalps and modest day trades (5 minute candle charts), use a +.30 (30 cent) profit goal and -.15 (15 cent) stop. 4: For swing trades (15 minute and daily candle charts) use a +30% profit goal, -25% stop. There is infrequent occassions when a swing trader can identify the beginning of a fresh change of direction for the market (reversals). In these instances use a +100% profit goal and -25% stop. 5: Never invest more than 10% of your total option trading account into each trade! 6: Never loss more than -2% to -2.5% of your total option trading account on a single losing trade! 7: Use only brokers with no minimum fee and 1 dollar (or less) commission charge per option contract. This is real important with a small account! By following these rules, even a small account can survive 40 or more consecutive losing trades before its wiped out.
Excellent, I am going to be doing exactly this on Monday's open. Two questions: 1) Why SPY options. Is it because of the extra liquidity? Would certain equities that are reaching highs have greater swings, allowing for profit goals to be reached? 2) My broker (questrade) charges $9.95 per option trade + $1 per contract. Should I still give it a shot?
That is pretty expensive. I'd suggest ThinkOrSwim or InteractiveBrokers. SPY options because of penny spread, some equity options have spreads as wide as 50 cents ... which of course will hurt you a lot over the long run unless you can somehow overcome that, again, in the long run.