Swing- and Day-Trading Advanced Strategies

Most examples you see usually involve single option contracts, for the sake of clarity. However, swing and day trading do not necessarily have to be limited to single contracts to control 100 shares of stock. Especially when option premium levels are quite low, using multiple contracts saves on brokerage fees while increasing profit potential. In addition, using multiple contracts vastly expands your strategic potential for swing trading, including taking partial profits while keeping the remainder of a position open, and expanding swing trading into more advanced options strategies such as straddles and spreads.

For example, one popular online brokerage firm (Charles Schwab) charges $9.95 for a single option trade, plus $0.75 per contract.
However, when multiple contracts are involved, the savings are substantial:

Number of OptionsTransaction Fee
1$ 9.70

At five contracts, the cost per option is only $2.54. So substantial transaction cost savings are going to be realized when trading in multiple option contracts. But there are other and more important reasons to use multiple contracts. It adds flexibility to swing- and day-trading strategies. Example of how you can vary your strategies with multiple contracts include:Multiple contracts give you greater flexibility in a swing- or day-trading program, while also enabling you to execute trades for very little additional cost. Yet another interesting twist involves combining a swing-trading strategy with covered calls.

One of the great advantages in using options rather than stock is that you can use puts instead of the high-risk shorting of stock. But there is a mirror strategy of this, and it involves using covered calls instead of buying puts. If you do not own shares of stock and you reach a sell setup point, the obvious move is to buy puts. Then, when the stock declines, the put becomes profitable. However, if you also own stock, you can write covered calls rather than buying puts. This provides you with a double advantage.

First, the covered call is safer than the long put because time value is involved. As time value declines, your short call becomes less valuable and can be closed out (bought to close) at a profit. Second, you have to pay money for the long put, but when you write a covered call, it produces cash that goes into your account.

Smart Investor Tip

Covered calls are conservative strategies in their own right. But as part of a swing-trade strategy, covered calls make even more sense because they are tied to a sell setup. You can take profits within a few days without having to sell stock. This approach also produces cash rather than spending it.

You might consider many options-trading strategies to work as swing trades. But the strategy itself is invariably based on short-term price swings identified with specific setup signals. Swing-trading signals improve your profitability even when using options near expiration. The same advantages applied to listed stock options can be applied with equal benefit to options traded on futures contracts. Leveraging Your Leverage shows how this works.
By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2020. Content published with author's permission.

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