The contents of this blog entry was first posted here a year or so ago about buying SPY calls and puts for day trades.
I am copying the contents of that post here in order make it easier for me to find. Plus, the current volatility in the market makes this strategy better than ever.
There are so many options strategies in the stock market the head spins – a straddle, a strangle, a naked and/or a covered put and/or call, a calendar, a condor, an iron condor, an iron butterfly (isn’t that a rock band?) and any combination of any of these for hedging purposes, for capital appreciation or preservation, for gambling. Mind boggling.
But buying options…
Buying options, just plain buying a call or a put, everyone will say is a “fool’s game.”
Regardless of whether a trader buys calls or puts on index ETFs like SPY or QQQ or IWM, or buys options on stocks, there are only three things that can happen – the option goes the trader’s way (good), or the option goes against the trader (bad), the option goes sideways with price decay over time (also bad).
Two out of the three possibilities for the option buyer are losers. What fool would want to play that game?
But is it really a fool’s game, like everyone in options trading says?
For day traders it doesn’t have to be. If the trader is persistent, discipline and experience, it almost never is.
Let’s take SPY options as the prime example — very liquid across multiple strikes, tight spreads, hardly any time decay on a trade for only a day, a stop-loss is close by and immediate, and the profits, if there is a trend for the day, can be substantial, even rather astounding.
Also great for scalping on any time frame intraday.
Again, I must stress the key, as always, is persistence, discipline, experience, and an entry signal the trader is comfortable taking.
I have included the chart below from today as an example – the SPY 278 in-the-money call, expiring Friday, up 106% to close the day trade. (I will probably edit this out of this post, along with the chart, as time goes by.)
(Click on the chart for a larger view)