Is it better to day trade or swing trade options? This is a question I get asked a lot because it’s a bit of a stumbling block when it comes to trading…
The simple truth is there isn’t a one-size-fits-all answer, but that doesn’t mean it has to be complicated.
If traders want to find the right answer, all they need to do is ask themselves a few easy questions.
Let’s dive in, and I’ll break down what we need to know to help set ourselves up for successful options trades…
Key Questions for Successful Options Trades
The first and most pressing question that needs to be answered before booking a successful options trade is how long does the option have before it expires?
The closer an option gets to expiration, the faster it will lose its time value (also called theta decay or time decay).
That’s a big deal if you’re buying an out-of-the-money option because the farther we go out of the money, time value becomes a larger percentage of the premium.
In the example below, the Tilray Inc. (Nasdaq: TLRY) $15 strike call option is out of the money by $1.25 and selling for $0.12 of premium. Time value makes up $0.07 of the premium and the contracts will expire by the end of the week.
Ignoring volatility, that means if the stock stays the same price on the day, the option premium will drop by $0.07 — 58% of the price of the premium.
That’s a huge chunk of value to lose for no good reason. So if we’re holding on, we need to be confident we can make it a successful options trade.
How Much Does It Take?
The next question we need to consider is how much the stock needs to move for us to hit our profit target?
To find that out, we need to look at the delta. In our example, the delta for this call is $0.17. This means that for every $1 gain in the underlying stock, the option premium will go up by $0.17.
Let’s say we want to hit a profit target of 50% on the call… We need the stock to gain about $0.35 — around 2.5% — that day. And if we wanted to hold it overnight, we’re going to have to tack on another $0.07 to that move for a successful options trade.
With that info in hand, we can start to measure our decision whether we want to buy and sell the option the same day, or if we want to hold it and see if the stock can swing higher.
Check out the video below and let me show you how I put this information to work trading options. Don’t forget you can follow me @LanceIppolito on Twitter, Instagram and our YouTube channel for more trading insights and tips. And as always, you can find me right here talking stocks and options trading — and printing money — on WealthPress.com!
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