Options Used for Other Trading Strategies
Swing trading is only one of many possible trading strategies in which options can play a valuable role. In fact, swing trading is an extension of a better-known strategy called day trading. The day trader
typically moves in and out of positions within a single trading day, so that the open positions do not extend from one day to the next. Day traders also tend to be high-volume traders, moving in and out of positions frequently and on the same stock, often tracking prices minute to minute. Day trading is perfectly suited to options in the same way and for the same reasons as swing trading: greater leverage and lower risk.
Because day trading is extremely short term in nature, cheap options near expiration and slightly in the money are real bargains. With little or no time value, options enable day traders to control 100 shares of stock per contract, for only a fraction of the cost of trading stock. The risks are limited as well, due to lower investment requirements and the ability to use calls and puts equally in long positions.
Day traders are able to avoid a margin requirement, and this has caused problems for regulators. Under the rules, margin requirements are based on positions open at the end of each trading day. So a day trader could avoid having to meet margin requirements while still placing a large amount of capital into positions, as long as those positions were closed before the end of the day. Because this practice can lead to large losses for the trader as well as for the brokerage firm, a qualification was enacted and applied to day traders. Anyone who trades on high volume (meaning moving in and out of the same positions four or more times within five consecutive trading days) is classified as a pattern day trader
. Anyone meeting this standard is required to leave at least $25,000 in their account. If they do not maintain the required level, they will not be allowed to execute further trades once the pattern day trader status is triggered.
By Michael C. Thomsett