An optimal swing trading Options strategy needs to give your stock enough time to get through your strike price so it can pay you out on that Call Option otherwise your option might expire worthless. By the time I started trading options I already knew enough about the markets and more importantly about risk to make reasonably good trading decisions.
BREAKING DOWN 'Swing Trading'
Even better, if the larger percentage move is due to some earnings reports and has a strong catalysts behind because it means the stock price is driven by strong fundamental reasons. The simplest method to define a bullish trend is to look for a series of higher highs and higher lows. Besides, determining the overall market trend you also need to assess the characteristics of your market environment: This will help you later pick the expiration date of your Options for swing trading.
Ideally, what you want to do is to pick an out of the money option but one that is not too far out of the money and goes into the money. An optimal swing trading Options strategy needs to give your stock enough time to get through your strike price so it can pay you out on that Call Option otherwise your option might expire worthless. As a general rule, if your expiration time is too big, on the one hand, the risk decreases, but at the same time, the percentage gains decrease as well.
The best swing trading Options approach is to use monthly options as you get a relatively higher percentage gain. As a general rule you need to be aware that Options for swing trading requires time and you need to be patience.
You can you our trade tactics on how to trade pullbacks here: How to Profit from Trading Pullbacks. Also, always define a maxim stop loss after you bought an Option and align your take profit with where you think the market will be before your option expires. During periods of low volatility, you want to reduce your position when doing Options for swing trading. If you still believe in your trade and you think you need more time just roll your Option to following month. The most profitable option trading strategy needs to be suitable for executing both Put and Calls options.
Use the exact same rules — but in reverse — for buying a Put option trade. In the figure below you can see an actual Buy Put Options example using the best swing trading Options. The swing trading Options strategy is a powerful Options for swing trading, however, like any other strategy, it does require some knowledge of how to use it properly and we hope that our best swing trading Options will help you generate steady profits.
There are big opportunities to make money with Options for swing trading because they can be very profitable and are a much safer way of trading than simply trading stocks. The day to day fluctuation in the stock market tends to shake a lot of people out of their trades and the best swing trading options tends to smooth out that price action a little bit so they tend to reflect a little bit more stable trading opportunities.
Your email address will not be published. The three popular signs are:. Three or more consecutive uptrend or downtrend days. So an uptrend is three or more days of higher highs and higher lows. A downtrend is the opposite. A narrow-range day NRD: One of the strongest set-up signals is the NRD, a day in which the opening and closing price are very close together. However, an NRD can also have a wide trading range even though opening and closing prices are close to one another.
This indicates that buyers for upside trading movement or sellers for downside were not able to move the price in the desired direction. When you see an NRD after a clearly identified uptrend or downtrend, it signals the end of the trend and a reversal.
This tells you that traders were very active in the stock, which often occurs just before price turns around. Chart courtesy of StockCharts. Note the highly visible uptrend and downtrend, narrow-range day and volume spikes. All of these signal the end of the trend and likelihood of reversal. When you see combinations of these three signals, it is a strong sign. If you are already in a swing trade, it is an exit signal. Swing traders face a problem, however, even when they are able to spot very clear entry and exit signals.
At the top of the trend, the signal foreshadows a downward trend. However, many traders are hesitant to sell stock short due to the high risks of shorting. As a consequence, many swing traders only play the long position, looking for entry at the bottom and exit at the top.
Consequently, they only take part in half of all swing trading opportunities. Options solve this problem without adding risk. In fact, using options in place of stock reduces the market risks of swing trading.
In that outcome, you have to cover the short position at a loss. The same share exposure can be traded on both sides, and always with long positions. Using calls to enter at the bottom and puts at the top solves the problem. For a fraction of the cost of shares, you can expose yourself to the same market opportunities of swing trading shares. But you can never lose more than the cost of the option. Using options allows you to trade long on both sides of the swing, while leveraging your exposure and reducing market risks.
All forms of swing trading contain some risk, but using options is a lower risk than using stock. Options also allow you to trade many more stocks in a swing trading strategy because you only need a small fraction of the share cost to control shares of stock.
Another interesting aspect of option-based swing trading is the benefits of impending expiration. In most option strategies, expiration is the ever-present problem.
Traders have to balance the premium cost with the time issue. However, swing trading is based on a very short cyclical price swing of three to five days. Because you expect the short-term trend to play out very quickly, the best bargains are calls and puts that expire within a couple of weeks. Soon to expire options have little or no time value remaining, so their intrinsic value is at the most responsive point possible.
Both calls and puts are most likely to mirror price movement of the underlying stock, increasing in value point for point. An in-the-money call with increase point for point with stock as its price rises or will fall as it declines. An in-the-money put will do the opposite, rising one point for each point of decliner in the underlying stock or will lose one point for each stock point to the upside. The most basic option-based swing trading strategy involves buying calls at reversal points after downtrends; and buying puts at reversal points after uptrends.
But at least four variations of this basic strategy can also be used:. Long and short calls: One variation is to use only calls for swing trading, so that one side long costs money and the other side short produces immediate income.
A long call is bought at the end of the downtrend and sold after a price run-up. A short call is employed at the top-side reversal set-up. Using uncovered calls in this strategy makes the short side of the swing very risky.