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STOCKONOMY UNIVERSITY

How I Day Trade Options

Options Trading Terminology

Support:

Resistance:

Contract:

Premium:

Days ’til Expiration (DTE):

Strike Price:

The Greeks (Delta, Theta, Gamma,): 

My Tickers & Watchlist

I use the same watch list everyday, “Focus.” It features 10 tickers. This saves me time and helps me dial in my focus. Trading the same stocks helps me understand how they move and which stocks I trade better than others. Option premiums and volatility make up for an underlying’s percent move so it’s not necessary to sift through 50-100 stocks every day or week to find the best setups. Using options levels the playing field.

For example, AMD post earnings beat, is often down or flat at the open. I know this is not indicative of the possible next day move. I’ve caught multi day AMD bull moves despite price opening negative post-ER. 

The watchlist features greatest technology companies in the world so fundamentals are never an issue. More importantly, they are extremely liquid and follow the overall market (SPY, QQQ, VIX) which is helpful in identifying bearish & bullish trends. 

Liquidity allows me to get in and out of trades instantly at market, ask, and bid prices. This is helpful buying breakouts and using stop losses. I have traded illiquid stocks, slapped the ask, and opened trades at -5 – 15% before. That’s not very sustainable. 

You can assess liquidity by the contract’s ask/bid spread and volume to open interest ratio.

The ask/bid spread is the difference between the ask and bid prices. If the ask price is 3.05 and the bid price is 3.00, the spread is 0.05. That is excellent liquidity. Generally, I like the spread to be no more than 0.20. I simply trade the watchlist below and never worry about liquidity. 

Volume is the number of contracts traded (bought or sold) that day. Open interest is the number of open contracts at the start of each trading day. Volume changes throughout the trading day, open interest does not. Generally, I like to volume > open interest.

I simply use the watchlist below along how I pick my strike prices (more below) and never have to worry about liquidity. 

The watchlist is as follows:

AAPL, MSFT, AMD, NVDA, TSLA, AMZN, META, GOOG, SPY, QQQ.

If you’re struggling it may even be helpful to shrink this list in half by picking one ticker from each of the following groups.

Group 1

SPY, QQQ

Group 2 

AAPL, MSFT

Group 3

AMD, NVDA

Group 4

META, GOOG

Group 5 

AMZN, TSLA

 

My Day Trading Levels

I use the same levels everyday. This saves me time, but are also levels for breakouts, volume, and consolidation.

The levels I use are:

Previous day high & low, pre-market high & low, and the gap (open & close). I also, keep track of other keys levels such as All-time or 52-week highs & lows and daily support and resistance levels, but the first sentence of this paragraph is my day-to-day bread and butter. I use a custom built Thinkorswim study to automatically plot my trading levels. 

Here’s how I think about the levels:

Previous day highs & lows and pre-market highs & lows act as major support and resistance levels. A break of PDH and PMH is considered a breakout and possible trend day. The same can be said for the downside. 

When price stays within the PDH and PDL this is consolidation or an inside day. Usually, less volume and this can be considered a resting day. You’re not going to find any big moves on this type of day. 

The open and close act as support and resistance too, a break into the gap is a grood trade for a gap fill. Continuation through the gap may lead to a bullish or bearish engulfing days. These days can have the biggest and most powerful trends. 

These are the major levels I use for my day trading. As the day goes on, new levels will surface, but these are my keys to find trends and key levels.

How I Choose an Options Contract

Since I have already have a liquid watchlist, I don’t have to worry about liquidity. My only two criteria for picking a contract are DTE and Delta. 

My DTE is always between 0-4. The more days prior to expiration the less volatile and risky your premiums will be with 4 being least risky and 0 being most risky. If you’re new to this, I’d suggest paper trading and/or using 5-9 for your DTEs. Trading 0-DTE will blow up an account fast. I’ve been there, it’s not worth it.

I pick my strike price based on the Delta. I like to use a delta between 0.30 and 0.60. I think of delta as percent chance the trade is successful. Delta of 0.30 means I have a 30% chance to profit on the trade. Therefore, a delta of 0.60 is less risky than a delta of 0.30.

Your premium will not decay as quickly using higher deltas. If you’re trading 0.20 deltas, your position will be crushed on dips and will be extremely difficult to recover from. Therefore, lower deltas means smaller positions and tighter stops.

I like to strike a balance between DTE and Delta. With a higher DTE, I can afford to use a lower delta. As DTE decreases and especially on 0-DTE, I am extremely careful in using higher deltas (0.40 to 0.60). A delta of at-the-money or just out-of-money is usually around 0.40.

How I Manage Risk & Size My Trades

My max risk is between 1-5% per trade. This will be dependent on what you are a trader are comfortable losing on each trade. However, you should never risk more than 5%.

For example, if my max risk on each trade is 5% of my account. If I have $10,000 in my trading account, then my risk per trade is ($10,000 * 5%) = $500. 

$500 is not my position size. My position size is determined by my max risk and my stop loss. My max position is (Max Risk $) / (Stop Loss %). Through 1000s of trades, a stop loss of 20% is what generally works for me. 

Using the above example, my position size = $500 / 20% = $2500. 

To simplify, 

Position Size = Max Risk $ / Stop Loss %

Position Size = Account Value * Max Risk % / Stop Loss %

If I always use a max risk of 5% and max stop loss of 20%, then:

Position Size = Account Value * 5% / 20%, or…

Position Size = Account Value / 4 

This makes the math simple and easy to do on the fly. Keep in mind, this is a large position so it is essential you stick to your max stop loss and max risk no matter what. 

Just because your max risk is X and your max stop loss is X doesn’t mean you cannot set a tighter stop once you’re in the trade. It is simply a quick method to entering trades taking risk into account. Use a stop loss level that makes sense, as long as it’s not larger than you’re predetermined levels.

How I Choose a Ticker and Trade

My goal in day trading is to identify stocks from my watchlist with the most strength or weakness on a given day to catch the biggest possible move in the direction of the market trend. I don’t want to fight the trend of the market. This means, if the market trend is bullish, I want the ticker with most bullish price action from my watchlist. 

I do this using custom watchlist columns and indicators I’ve built on Thinkorswim. 

Each of these indicators measures the percent move during market hours while accounting for implied volatility. This is not a stocks percent change for the day. Why? Because I’m day trading options during open hours. It’s irrelevant if AMD gaps up 10% after earnings if price is slowly falling through the day. This would be a bearish trend in my view for the day. Why do I account for implied volatility? Implied volatility levels the playing field between high and low beta stocks. This is how option premiums are priced. In the options world, a 5% move on ROKU and a 5% move on AAPL are not equivalent. When accounting for implied volatility, AAPL +5% is way more bullish than ROKU +5% because ROKU is a high beta stock meaning it is more likely to experience those types of swings. If you caught this full move on AAPL and ROKU trading options, the AAPL returns would be much better. The goal is to catch the biggest movers accounting for implied volatility when day trading options.

The indicators are MOVE, PDH, PDL, and Market Trend. 

MOVE shows the percent move during markets while accounting for implied volatility. If I’m looking to trade calls, I want to trade the highest MOVE scores. No one knows which stocks will be the strongest on a given day, so this rating gives me my edge. A move score of more than 5 is a strong move in my opinion. 10 is exceptional and is where I’ll see 150-300% trades.

PDH shows where price is at with respect to its previous day’s high (PDH). To catch the biggest moves, I want to trade a stock that is breaking above the PDH. This gives you potential for runaway price movement, similar to what you’d see on a 52-week high breakout, just on an intraday time horizon.

Market Trend is….

Combining PDH and MOVE gives me my edge in trying to identify the best price action.

When I Enter & Exit Trades

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My Trading Platform and Setup

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How I Hold Myself Accountable

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Supporting Materials (Thinkscripts)

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Conclusion

Step-by steop all in one infographic long and narrow (down)