The Advantages and Risks of Day Trading Options

There are many advantages and just as many risks when it comes to day trading options.

Let’s cover the advantages first. One of the main advantages is how easy it is to trade options. Options trade just like stocks with means if you buy a stock in in the morning and its price goes up a few hours later, you can sell it and make a profit.

If you love to day trade, day trading options works in a similar fashion. It’s also an advantage that when it comes to trading options, you can earn a very nice return with just a little bit of money invested.

For example, you can see the price of an underlying stock move from $28 to $29, but its option price could rise from $1 to $2. That’s doubling.

To generate a substantial income from day trading stocks it will require tens of thousands of dollars usually to start. Fortunately, you can day trade options for a lot less due to leverage.

Options are cheaper than stocks which also offers more diversity. You can easily create a portfolio that is diverse so you are protected if one sector or industry goes down on a particular day.

The ability to hedge is another advantage. Due to being able to buy and sell both put and call options, you can work both sides of the market, going both long and short.

There is also a reduced risk of loss due to time-decay. This is because options have a contract expiration date so they’re subject to time-decay, with the option price dropping every day as it gets closer to expiration. Traders who are long on options for a while will often see their positions drop gradually to $0 even though the underlying stock doesn’t move. People who day-trade options, don’t have to focus on time-decay.

Now that we covered the advantages, here are some disadvantages.

There is a risk of experiencing a significant loss. Leverage can provide significant gains but can also provide significant losses. The same way a stock can go from $28 to $27, an option can go from $1 to just a few pennies. What a loss!

There are wide spreads which means options aren’t always as liquid as stocks. The bid-ask spread can be wide.

There is also a less chance to profit from time-decay. When you are trading short, time-decay can be beneficial. Margin requirements can also be very steep especially with an online brokerage.

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