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2 Ways to Day Trade Options – Short vs Long-Term Ep 41

Today we are doing another Q&A session.

Here’s the question:

“Hey, Sasha, this is Rob. I just came up with a follow-up question regarding day trading options in and out of the money. Great info by the way. I’m also curious to see if you can elaborate on the choice of an expiration date. If I’m concerned with the price movement throughout the day and enter with a small amount of capital on something if that expires: let’s say like 5 to 10 days from now.

Here’s my concern. I don’t want to pay for more time values that I don’t necessarily need and rather sell them back to the market before time decay kicks in anymore. I’ve had great success with this on like five or six occasions, of course, only entering if that did ask for it is favorable. But I do find that I tend to lose that money if I keep those positions overnight presumably due to time decay or just like the volatility swinging up and down.

I assume in this case I would be trading at or in the money any pointers you could suggest on that expiration would be helpful. I’m still over this, but volatility is telling me that I need to be able to trade a little bit more in both directions instead of just like waiting on the sidelines for my long halt about back if I get caught in a directional change.

Like I said the first time I’ve seen the market, it’s volatile, so I like the clouds a little bit. I’m not sure if that’s a good strategy, especially when things start to fill down a little bit. Let me know if you have any suggestions. Thank you!”

Let’s summarize this in short

We’re looking to day trade options. There are a couple of ways to do it. Typically most people do it buy a call, sell a call, buy a put and sell a put doing single individuals based on the movement of the stock price. That’s one way to do day trading options.

Another way to do it is also to do it with short term duration. But capitalize on pay to decay. I’m going to show you the first way, which is the question that was asked.

The whole point is what Rob was getting at was this: let’s trade these options 7-day 14-day options rather than day trading these options 84 days out or 120 days out because you have to pay more. These cost more, but the trade-off is less time decay.

These up here cost less, but fast time decay.

That’s a trade-off that you have to deal with. And typically, if you’re day trading Google I’ll go with a seven-day option. And if I do a 7-day and I’ll go to the 140 let’s say I’m looking for it to go to the downside. That’s just because the put is out of the money right here.

I’ll buy a single well that single costs me $1280. If I do that same thing going into August all of a sudden, that single cost me $5,000. That’s because you’re paying for more time premium.

What he’s getting at is why do I need to go to August. I don’t need to pay for more time premium, and you don’t have to. You could go with a shorter time premium. But the problem is you’re losing $77 per day if you’re going into May.

And if you’re going into March, you’re only losing $13 per day. If it was a three-day trade or a four-day trade, you’re not losing as much. You could do shorter-term duration traders. However, you have to keep in mind this Delta factor. 

Version #1 of Day Trading – Looking at Delta Factor

In this case, if you’re capitalizing on the movement, the Delta here is -43. If we go to May, you have -47. If you want to bump up your Delta (because you’re making money from the movement of the stock), the better approach is to go deep in the money. In this case, for a put side.

Let’s say 1,200 on the put side. I can ramp that Delta up to almost be exactly like the stock. You can see here it doesn’t have the other line at the moment. But really what you’re doing here is you’re increasing on in the money.

That way, your Delta is as close as possible to almost 100 shares. Because you’re controlling 100 shares with a call or a single put, and now you’re getting nearly 85% of that move.

So $85 per $1.00 move in the stock. If you’re trying to get as close as possible to the stock, you have to go deep in the money in that direction. If you were to do a call, it’s the opposite. Here it’s only 14 Delta.

And then if you want to go deep in the money (1050), now you’re getting 92. You’re going 1 to 1. And the thing is is when you’re trading options on a day trade basis, the issue you have is that theta decay. You can use that to your advantage.

A theta problem is the biggest issue because you’re a buyer of an option. And it’s a shorter-term duration. That’s your biggest concern. You do have some vega there as well. But really, you’re trying to make sure that that Delta is high enough way above your theta and way above your Vega. That way, you make money on the movement.

Version #2 of Day Trading

Here’s another way to day trade options also to go 7-14 days out. Let’s take a calendar spread here. If I do an inverse of this, I’ll go right at the money. It doesn’t matter call or put. We’ll go right at the money, and one will be about seven days out. And this is a weekly.

And the other will be about 14 days after that. I’ll go on June the 21st. Now, look at this.

Well, now I’m capitalizing on that theta. The theta is super high. So when would I want to do this? Well, it’s when the volatilities are crazy because what happens is this theta is so high relative to my Vega.

You can see here in one to two days I can make a vega problem – volatility problem.

In 3-4 days later, my theta is even higher than my Vega. And that’s when you would want to put on trades like this. Let’s say a calendar trade you’ll do a 28-day trade. And do 50 strikes. And let’s do the same concept to buy a calendar, and we’ll go the next one July 19th. This is a typical calendar that you may do. But now look at how many theta to your Vega ratio. It’s about four times the difference.

It takes four days to make it up. When you look at a shorter-term duration, it’s one to two ratio. It only takes 2-4 days versus two days. You can see your theta will knock out your Vega and that Vega is not going to hurt you as badly. It can still hurt you, but it’s not as bad as the long term duration. This is when volatilities are a little crazy. You might want to go shorter-term duration. The reason is that your theta is doing the work for you.

Other times with longer-term durations, your Vega might be doing the work for you in a lot of instances. That’s because it is a bigger agree. Here, it’s a whole different approach. And this is another way to day trade options because now a couple of days into it you’re already up. Let’s say $180 three days into it and $170 at $1500. That’s 10%. 

If I’m doing a single, maybe that stock goes up, and yeah, you might be to make let’s say $4,200 on $9660. That’s 50%. But in this case, if the stock doesn’t move, you lose. If a stock goes against you, you lose.

The only way you make money is if it explodes. Even if it goes up a little bit, you still are losing on the theta. Whereas a shorter-term approach (on a calendar, a butterfly, an Iron Condor), you have a much higher theta.

If it stands still, you win. If it moves up a little bit, you win. Moves down a little bit, you win.

Maybe it moves up a lot, and that’s when you lose. If it moves down a lot, that’s when you lose. You have much more win-loss chances or situations here in a much favorable situation than you do on the single.

However, the single you make a little bit more, but is that extra percentage worth the trade-off? That’s something you have to decide. It’s all about risk management.

Final Word

Here’re two ways to day trade options. One way deep in the money because your Delta is just so high, and then you’re looking for a directional move.

The other way is shorter-term durations, and that way, you burn that theta real quick collecting that data collecting that premium as a seller.

If you have a specific question that you want me answered, submit one by voice here!

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