Just like trading stocks, there are a variety of trading styles that an investor can employ when trading options.
With the advent of online trading, your choices and the styles you choose to use are virtually limitless. You can easily go back and forth between styles to adapt to the investment climate or simply because you want to try something different for whatever reason. The type of options trader that you choose to become will depend on a variety of factors. Some of these include: the time you have on hand to track your investments, your investment goals, the amount of risk you want to take on, the comfort level you have with trading options, and the so-called niche that you find within the market. It is important to remember that what works for one investor may not necessarily work for another for any one of these reasons. Therefore, as you explore the world of options trading, you should try to find a style that suits your abilities and goals and not to completely mimic what other investors do.
This section of the site will discuss four different types of options trading styles.....
1) daytrading
2) swing trading
3) intermediate trading
4) long-term trading
Daytrading
Daytrading is a practice which was virtually nonexistent prior to the advent of online options trading (and stock trading). It is the process of continually buying and trading stocks or options in the hopes of getting modest returns on each trade. Over the course of time, such profits can total a pretty hefty return on investment. Somewhat analogous to sprinting a marathon. It takes significantly more time than other trading styles simply because you constantly have to be on top of your investments. With the Internet, the tools to do such a thing are there. The reason why daytrading didn't really exist prior to the Web is because you would simply drive a broker insane if you continually called him numerous times each day getting in an out of a stock to the point that he'd probably not want to do business with you anymore, no matter how much commission you bring him. In extreme cases, this could mean calling your broker every five minutes!!
Daytraders are investors who are constantly in and out of investments literally within a couple of minutes, many times even less. Once they buy into a stock or option, they are immediately looking for an opportunity to exit with a modest return. If the investment just goes up by a little bit, they immediately get out - a so-called "hit-and-run." There is absolutely nothing wrong with this. It's just that many people equate it to gambling. Many traders would disagree, however, because with investing information is always a leverage point and you should always make your investment decisions based on due diligence and reliable information you've acquired. It would be foolish in many instances to enter an investment simply on a leap of faith, which is what gambling is. Again, use information to your advantage and you'll minimize a lot of the risk.
Also, an advantage with daytrading is that the time in which you're in an investment is so short that it greatly reduces the chances of outside variables unfavorably affecting the value of the investment. That is, the longer you're in a stock, the more likely it is that something unexpected and unforeseen can happen that would adversely affect your position. A terrorist attack that slams the stock market, for instance. An extreme case, sure, but you get the idea. If you're only in an investment for a couple of minutes, the less likely it is that such events will occur while you're invested. Chances are good that the stock or option will move solely based on the information that you used to enter the investment in the first place. If you look at daytrading in this sense, you may believe that the practice isn't as risky as many people make it out to be. As such, sometimes longer-term trading can hold more risk.
Daytraders of options tend to focus on options with very high deltas. The law of shifting deltas is discussed in another section of this site, but given that daytraders are only in an investment for a couple of minutes, they do not have time for delta values to increase significantly. Therefore, they tend to find options whose deltas are already high. If they're only going to be in the game for a finite period of time, might as well try to get the highest return possible. They also don't care too much as to how many days they are towards expiration, since they're not in it for the long term and are not likely to be adversely affected by an option's expiration.
It is not uncommon for a daytrader to exit once a modest profit has been reached, such as just 1%. They do not tend to stay in much longer, opting instead for profit-taking and later searching for more "hit-and-run" opportunities. In order for these modest profits to become significant, daytraders tend to put a lot of capital into their investment. After all, 1% of a really large amount can be a pretty big amount in itself. Sometimes a daytrader will put 100% - yes, 100% - of an account into one single investment in order to maximize the return within a very limited period of time. Since they're in and out pretty quickly, the money isn't at risk for all that long. Similar to stocks, once you're out of the investment, you really don't have to worry about what happens to the investment once you've exited since you won't lose or make any additional money based on what happens afterward. You may want to track the investment, though, in case you're planning to enter the same option at some future point.
A final point about daytraders is that they tend to invest in the options of stocks that have good volatility. This is because they want the option to move in order to make a reasonable return. If the price of an option remains relatively stagnant, then it makes no sense to enter since no money can be made if there is no change in price. Changes (sometimes big changes) in the value of options are what can make daytrading a profitable practice.
Swing Trading
Swing trading fits somewhere in between daytrading and intermediate trading, which is discussed next. Whereas daytraders literally spend the entire working day looking at their investments and execute many trades along the way, swing traders occasionally check their investments throughout the day but not religiously. Almost synonymous to checking e-mail on a regular basis. They don't look at every single movement and every single cent that an option oscillates. Instead, they opt for a profit higher than 1% or so and know that such a return won't happen immediately. A 5% or 10% return, though, could very well happen in the very same day. For that reason, it is not uncommon for a swing trader to be in and out of an option within the same trading day, even if they're in it longer than daytraders.
However, it is also not uncommon for swing traders to wait a day or so before deciding to sell on their position. They tend to find no discomfort at all with staying in an investment overnight. So long as they know they're trading with the "momentum," they know that it may be to their advantage to wait just a bit.
Similar to daytraders, swing traders tend not to get greedy and often exit when their goal has been met. In many instances, this can be between 5% and 10% as mentioned, but sometimes more and sometimes less. Also, they often pick options with somewhere between 30 to 60 days to expiration. Such a window allows good deltas (although maybe not the maximum) but also gives a buffer period in case the investor wants to stay in the option for a couple more days without being affected too much by the declining time value of the option.
Intermediate Trading
Intermediate trading is basically an extension of swing trading. Simply put, intermediate traders just tend to stay in their positions a little bit longer. They don't necessarily check their investments every couple of hours or even every single day so long as they are comfortable knowing that their position will be a favorable one in the immediate future. They aim for returns of at least 10% but can remain in their investments even if their objectives have been met. They figure that the risk of staying in a little bit longer is worth the reward since they think there is a good chance that the option will increase in value at least a little bit more.
The "foundations" are more important for intermediate traders than for daytraders or swing traders. That is, they hope for options of stocks with solid financials and good long-term prospects, even though they may not intend to stay in it for the long term. They tend to look for options with expiration dates ranging from anywhere from 2 to 4 months away.
Long-Term Trading
As the name implies, long-term traders are in it for the long term. They find comfort in knowing that they have selected options of companies with good long term prospects. They do not care too much if the options they have chosen have declined in the next day or next week because they believe that over the course of many months or even years, their selections will always survive the vagaries and variances of the market and come out ahead. Long-term traders definitely try to invest in companies with very good financials that will weather any unfavorable market conditions over time. As opposed to other types of traders, these investors do not necessarily have set goals for returns and even if they did, they may not necessarily exit their positions since they believe that it is better to stay in longer. Also, long-term traders do not really think about their investments like other traders, but do check up on them. They just have confidence that everything will be fine in due course. Favorable options for such traders are ones with expiration dates many months or even several years away
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