Share Market

Before understanding day trading options let us try to understand what does one mean by day trading and options in their individual terms. Day trading is buying and selling financial instruments like equities, equity options, futures contracts, and commodities amongst others. Meanwhile, options are a type of financial instruments in which the buyer of the option has the right but not the obligation to execute the contract.

There are two types of option orders, call and put options. In a call option, the buyer of the option has the right but not the obligation to buy the contract while the seller of the option of contract has the right but not the obligation to sell the contract.

A few terminologies which the option trader should have in mind before plunging into day trading are as follows:

Option price: Option price consists of two components, the intrinsic value and the time value. The intrinsic value of the option is that value obtained by exercising the options now. The time value of the options is a function of the option value less the intrinsic value. It is also seen as the value of not exercising the options immediately.

At the money: An option is at the money when the strike price of the option equals the spot price of the underlying security. It only has intrinsic value, no time value.

In the money: Meanwhile, an in the money option has both – the time value and the intrinsic value. A call option is in the money, when the strike price is below the spot price. Meanwhile, the put option is in-the-money when the strike price is greater than the spot price.

Out of the money: An out-of-the-money option has no intrinsic value. A call option is out-of-the-money when the strike price is above the spot price of the underlying security. A put option is out-of-the-money when the strike price is below the spot price.

Delta: A Greek alphabet in English literature, in options terminology, a delta means a number of positive points which an options or warrants contract will move for each point of positive movement in the underlying market. It ranges between -1.00 and 0.00 for long puts and short calls and between 0.00 and 1.00 for long calls and short puts

With these brief concepts, let us understand two day trading option strategies.

Day Trading Options Strategy 1: Near-month and In-The-Money

Near month-in-the money options consists of little time value and delta of close to 1.0, which are ideal for day trading purposes. Also, if one is going to day trade options, one should day trade near month in the-money options of very high liquid stocks.

Day Trading Option Strategy 2: The Protective Put

In case of day trading for upside moves on a particular share, one can purchase protective puts against the downfall of the share. A protective put is a strategy which involves buying the underlying asset while buying put option contracts.

While keeping in mind these strategies, one also has to keep in mind the effect of time value. For the near-the-money options, while the intrinsic value of the option increases with the underlying price of the security, the gain is offset by the loss of time value. All the best for day trading options!