Trading intraday options

Today we'll look at how to day trade options and why they have become such a popular tool for day traders over the past couple of years.
Table of contents

• The Top Technical Indicators for Options Trading
• Different Trading Skills Required
• What Are Options?
• My Simple Strategy for Trading Options Intraday
• My Simple Strategy for Trading Options Intraday

The relative strength index is a momentum indicator that compares the magnitude of recent gains to recent losses over a specified period of time to measure a security's speed and change of price movements in an attempt to determine overbought and oversold conditions. RSI values range from , with a value above 70 generally considered to indicate overbought levels, and a value below 30 indicating oversold levels.

RSI works best for options on individual stocks, as opposed to indexes, as stocks demonstrate overbought and oversold conditions more frequently than indexes. Options on highly liquid, high-beta stocks make the best candidates for short-term trading based on RSI.

All options traders are aware of the importance of volatility, and Bollinger bands are a popular way to measure volatility. The bands expand as volatility increases and contract as volatility decreases. The closer the price moves to the upper band, the more overbought the security may be, and the closer the price moves to the lower band, the more oversold it may be.

A price move outside of the bands can signal the security is ripe for a reversal, and options traders can position themselves accordingly. For instance, after a breakout above the top band, the trader may initiate a long put or a short call position. Conversely, a breakout below the lower band may represent an opportunity to use a long call or short put strategy.

Also, in general, keep in mind that it often makes sense to sell options in periods of high volatility, when option prices are elevated, and buy options in periods of low volatility, when options are cheaper. The Intraday Momentum Index is a good technical indicator for high-frequency option traders looking to bet on intraday moves. It combines the concepts of intraday candlesticks and RSI, thereby providing a suitable range similar to RSI for intraday trading by indicating overbought and oversold levels.

Using IMI, an options trader may be able to spot potential opportunities to initiate a bullish trade in an up-trending market at an intraday correction or initiate a bearish trade in a down-trending market at an intraday price bump.

Different Trading Skills Required

While the trader can choose the number of days to look at, 14 days is the most common time frame. Like RSI, if the resulting number is greater than 70, the stock is considered overbought. And if the resulting number is less than 30, the stock is considered oversold. The Money Flow Index is a momentum indicator that combines price and volume data. It is also known as volume-weighted RSI. The MFI indicator measures the inflow and outflow of money into an asset over a specific period of time typically 14 days , and is an indicator of "trading pressure.

Due to dependency on volume data, MFI is better suited to stock-based options trading as opposed to index-based and longer-duration trades. When the MFI moves in the opposite direction as the stock price, this can be a leading indicator of a trend change. The put-call ratio measures trading volume using put options versus call options.

Instead of the absolute value of the put-call ratio, the changes in its value indicate a change in overall market sentiment.

What Are Options?

When there are more puts than calls, the ratio is above 1, indicating bearishness. When call volume is higher than put volume, the ratio is less than 1, indicating bullishness. However, traders also view the put-call ratio as a contrarian indicator. Open interest indicates the open or unsettled contracts in options.

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OI does not necessarily indicate a specific uptrend or downtrend, but it does provide indications about the strength of a particular trend. Increasing open interest indicates new capital inflow and, hence, the sustainability of the existing trend, while declining OI indicates a weakening trend.

For options traders looking to benefit from short-term price moves and trends, consider the following:. In addition to the above-mentioned technical indicators, there are hundreds of other indicators that can be used for trading options like stochastic oscillators , average true range, and cumulative tick. On top of those, variations exist with smoothing techniques on resultant values, averaging principals and combinations of various indicators.

An options trader should select the indicators best suited to his or her trading style and strategy, after carefully examining the mathematical dependencies and calculations. Technical Analysis Basic Education. Advanced Technical Analysis Concepts. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. To trade options, I use a basic strategy. If the market is going up, I buy calls or sell puts. If the market is going down, I sell calls or buy puts. I prefer to be a seller of options rather than a buyer; however, there are some equities that move well enough in a day that buying the option pays better than selling the option and waiting for it to deteriorate.

Apple is a good example of this. Apple is one of the stocks that track very well with the E-mini for this reason I will use it as an example in this article. Though stocks have individual news and can move more at times or less , they will generally trend with the E-mini.

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5. “Or Sell”?.
6. The Top Technical Indicators for Options Trading.

I then look at where the E-mini is trading based off of its open up or down and the overall direction of the market for the day, and see if Apple is trading in the same direction based off its open. If so, I will buy an at-the-money, or first strike out-of-the-money, call if heading higher, or put if heading lower. I then give the market 30 minutes to see if the direction I traded is right. If so, I place a stop at half of the value I paid for the option, i.

If the market has turned and I am not getting paid, I will get out of the position and look for another opportunity later. If the market reverses, then I get out. If the market continues in my direction, I stay with the trade and move my stop just to the other side of the open by about 10 cents and then look to re-evaluate the trade at CT pm ET before the market closes. Chart 3 shows Apple and the E-mini on May 26, The closest strike would have you buying the June call on Apple.

This is just one example of a stock that can be traded throughout the day. Using the direction of the futures to get the trend shifts the odds in your favor of getting paid. There are many stocks out there, just verify that they trend with the E-mini before using them in this manner. Happy trading! Tom Busby is founder of DTI and a pioneer in the trading industry as a world-recognized educator. He takes a complex subject, the global markets, and puts it into an easy-to-understand language for all levels of traders and investors.