Building Small Profits, Fast: How to Use an Options Scalping Strategy for Trading.
An options scalping strategy utilizes options for making quick trades, often multiple times per day. Gains add up quickly; even one trade can result in a big percentage return.
I’ll show you how to scalp options effectively. Whether you want to take multiple trades or just one, you can start earning profits by following these steps.
Saqib Iqbal 20.03.2022 1743 Updated: 03.08.2022.
Content.
What is options trading? Quick Example of How an Option Works What is a scalping strategy? How does options scalping work? Best indicators to use for scalping options trading Tips for scalping options FAQs.
What is options trading?
First, I’ll show you exactly what options trading is. It may seem daunting, but I’ll give you an easy-to-understand overview.
Options trading allows you to buy or sell stocks, ETFs, and other securities at a predetermined price and on a specific date. They derive their value from the underlying asset (what the option is based on).
Image via NapkinFinance.com.
Options are divided into “call” and “put” options.
Call options allow the trader to purchase the right to buy a specified underlying asset at a pre-determined price in the future (the expiry date). Put options allow the trader to acquire the right to sell a specified underlying asset at a predetermined price in the future (expiry date).
Another way to look at it is that “call” options are bullish, while “put” options are bearish. Do you know options trading hit 7.47 billion contracts in 2022?
Options contracts in 2022.
There are some other key terms you need to know regarding options trading.
The strike price is the price at which you agree to buy the underlying asset through the option. The premium is the current price or value of the option. The expiry is when the option is no longer active. The option can be bought and sold up to the expiry date. Expiry doesn’t mean you have to hold the option until expiry. The premium or value of options is constantly changing, so you can buy and sell them any time until expiry.
The premium is the amount you pay for that trade. It is also the amount you get when you sell the option.
The value of the option (the premium) changes due to a number of factors, but mainly based on how far the price is from the strike price, the volatility of the underlying asset, and how long the option has till expiration. “Out of the money” means the underlying asset’s current price is below the strike price for a call option or above the strike price for a put option. “In the money” means the underlying asset’s current price is above the strike price for a call option and below the strike price for a put option. Each options contract includes 100 shares. If the option premium is $1, buying the option costs $100 ($1 x 100 shares). You can buy as many contracts as you like, but each contract is for 100 shares.
Those are the basic building blocks of an option. Now, let’s quickly tie together how it works, and then I’ll show you how to build profits using options scalping.
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Quick Example of How an Option Works.
That is a lot of terminology. So let’s look at an actual example and so you can see how this works in action.
Apple Inc. is a high volume stock with lots of options activity. Assume the stock currently trades at $142.36.
Yahoo!Finance provides free options quotes.
Those long strings of numbers on the left are the contract details – but it actually isn’t that complicated.
AAPL is the stock 23 is the year 2023 0127 is the option expiry date – January 27 C stands for Call 140, 141, etc is the strike price.
The last price is the last price the option traded at. The bid is the price someone is willing to pay for the option right now, and the offer is the price some is willing to sell at right now.
Change and % change show the change in price since the prior day. You can see there is a big price movement in options. Hundreds of percent in profits in short amounts of time. We’ll talk about that in the options scalping strategy sections below.
Volume is how many options have changed hands in the day so far. The options highlighted in blue are “in the money” because those strike prices are below the asset’s current price. At the time of this snapshot the stock price was $142.36, so all strike prices below $142 are in the money.
That means that if the option were to expire right now, that option would be worth something. All options in white are out of the money. If the option were to expire right now, the option expires worthless. Why? Because the call gives the right to buy the stock at the strike price.
Why would you choose to use your option and buy at $143 or $144 when the stock is currently trading at $142.36 (and you can buy it at that price)? But, up until expiration, each option still has a premium (value) because there is a chance that the option could move into the money.
That’s how it works, and you also saw how options can make huge percentage gains in short amounts of time. On this particular day, APPL stock was up 3%, yet that translated into 200%, 300%, and even 600% moves in some of those options.
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What is a scalping strategy?
Almost everyone craves the thrilling, edge-of-your-seat suspense of a good movie. A scalping strategy can give that same rush, but with the added benefit of real profits.
Scalping is a short-term trading method involving multiple trades which result in tiny profits. The scalper accumulates small gains which add up over time. Scalpers look for high-liquidity assets that can be bought and sold in the blink of an eye.
When the value of the asset tips into the target profit range, the trader closes the position and goes on to the next. Scalpers aren’t looking for patterns or attempting to predict price moves. Instead, they identify the opportunities in the right direction and exit the trade before any potential selloff.
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How does options scalping work?
We have discussed what options trading and scalping are. Every trading style has its methodology, so let’s see how the scalping strategy for options works.
Options scalp traders believe that you can have your cake and eat it, too: it’s possible to make small, lower-risk trades and reap the rewards. Their primary strategy is to gain a small number of profits before the chance is gone. This goes by quickly; traders hold their positions for minutes or even seconds.
It creates more profit opportunities within a short period. Now, you may wonder, what’s the best time frame for options scalping? The optimal time frame for options scalping is between 5 and 15 minutes.
A 15-minute time frame is great for confirming a short-term trend. On the other hand, an even smaller time frame, such as a 5-minute time frame, is ideal for exiting the trade.
Knowing when to exit the trade is the most important element of options trading.
As the expiry date approaches, option premiums tend to rise and fall quite fast. In scalping, you buy put options if you believe the underlying asset’s price will fall before the expiration date. If you acquire put options at one strike price and the price of the asset falls, you can exercise your option at the original strike price.
Let’s take an example: Assume you buy a put option on ten shares of a stock at $10 a share. The stock price falls to $5 per share before the option expires. You may still sell the ten shares of stock at the increased $10 per share price if you want to exercise your option.
On the flip side, you can buy call options if you believe the underlying asset’s price will climb before the expiration date. Your call option contract grants you the option to buy shares at $10. Meanwhile, let’s say the stock price rises to $15 per share. You may use a call option contract to acquire those shares at a lower price.
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Best indicators to use for scalping options trading.
To scalp effectively, you need to apply technical indicators. But what are some of the best indicators for scalping?
RSI.
Welles Wilder developed the Relative Strength Index (RSI), a momentum oscillator. The RSI measures the speed and rate of change in market price fluctuations. When it rises above 70, it is considered overbought; when it falls below 30, it is deemed oversold. Furthermore, you can use the RSI to detect failure swings, divergences, and centerline crossover.
RSI on the chart.
BOLLINGER BANDS.
Volatility is important to all options traders, and Bollinger Bands are a common indicator to gauge volatility. The bands widen as volatility rises and constrict as volatility falls. The closer the price gets to the top band, the more overbought the security is. Conversely, the closer the price gets to the lower band, the more oversold it is.
Bollinger Bands on the chart.
Moving Average.
“Moving averages” smooth the unpredictability of price movements and reveal underlying trends. The two most common moving averages are exponential (EMAs) and simple moving averages (SMAs). Moving averages calculate the closing prices for a given duration. A five-minute chart, for example, would use the closing price of five minutes.
Moving Averages on the chart.
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Tips for scalping options.
Scalping can be fun, but it can also be risky if not planned correctly. Here I’ll mention three tips you should keep in mind.
1. EXIT THE TRADE SMARTLY.
Planning your exit strategy is about more than just reducing the loss if things go wrong. You should have an exit strategy even if a trade is going your way. It’s a good idea to set your upside and downside exit points ahead of time. You must have an exit planned for any trade, whether a winner or a loser.
2. TRADE WITH YOUR HEAD, NOT YOUR GUT.
Scalping options can be tricky, and things will not go your way every time. In scalping, it’s easy to get caught up in the rush of fast-paced trades. This can cause amateur scalpers to either close their positions too early, or take too much time making a decision.
Rather than learn from the experience, a lot of traders are tempted to go, “It’s the market that’s wrong, not me,” and repeat the same mistakes again. Trading with emotions won’t help you. You have to stick to the plan. If you lose, don’t beat yourself up; we all have bad days. Don’t be tempted to fall into a cycle of revenge trading.
3. CHOOSE THE RIGHT POSITION SIZE.
Most position sizing mistakes are caused by one of two things: fear, or greed. Fear can result in a position size that is too small to see any real benefits.
On the other hand, if you make judgments based on greed, you may wind up trading with a position size that is too large for your account. Your position size shouldn’t be too large or too small; you should be satisfied with the amount of capital you will lose if something goes south.
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FAQs.
Can we do scalping in options trading?
Yes, we can! Scalping in options trading is a bit different than forex or stock scalping. Although many scalpers choose forex and stocks, options trading is also suitable for scalping.
What is the best options scalping strategy?
There isn’t any particular best options scalping strategy. You can try different strategies in the 1-minute, 5-minute, or 15-minute timeframe. You just need to lower your risk while you experiment and get your bearings.
Is scalping a good strategy?
Scalping is a good strategy for traders who use it as their primary strategy. As mentioned earlier, a proper exit plan is essential for compounding small earnings into significant returns.
Can you trade options for $100?
Yes, you can! It all comes down to your strategy, like scalping and choosing your broker. Technically, if your broker allows it, you may start trading with as little as $100.
How can one become a successful options scalper?
To become a successful options scalper, you must have a trading plan and proper risk management. You should also combine technical and fundamental analysis to make informed decisions.
Can I scalp news events with binary options?
Yes, news events cause large price moves. You could purchase calls or puts, or set up a strangle or straddle strategy if you are unsure which way the price will go.
FINAL THOUGHTS.
So, now you know how scalping works for options trading, but be sure you have a good handle on the fundamentals before you take the plunge. Re-read through this guide again if need to make sure you’re confident in where to begin. Start small and with short time frames while you’re just getting started, and pretty soon you’ll be building your profits.
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