Day trading is tough enough as it is. Don’t make things harder on yourself when you are using options.
There are a number of things you must concern yourself with if you are going to employ this methodology, but three are key – liquidity, delta, and theta.
I hear many “options professionals” tell their clients to just trade in-the-money options, as they offer a lot more leverage than going out and buying the underlying, and they act just like the underlying, as the market moves up and down.
That’s great in the theoretical world, but, sadly, we don’t trade there. Liquidity is what is at issue here. The bid/ask spread will simply be too wide to effectively day trade an in-the-money option.
But, we need delta exposure! Since we are trading directionally, we need an option that moves as the underlying moves. The best maximization of liquidity vs. delta will most likely be an “at-the-money” (!50 delta) call or put depending on our desired direction.
Now here is the last consideration – theta. Theta is time decay. If you trade an option with very little time left to expiration, you run the risk the decay will cut into the extrinsic value of your option, and although you may be right on a directional basis, you have no profits to show for it. An option with 30-45 days to expiration will accomplish this without giving up liquidity and exposing yourself to too much vega risk.
