Why is it hard to day trade options ?

Most experienced traders play options for expiry, they buy options on events when high volatility is expected. Both are positional style trades, for our day trading we can either buy or sell options, as said earlier it is not recommended to buy options on a daily basis unless high volatility is expected. Therefore we are left with options selling, let us instigate further in this.

Note hedging stocks using options is not the scope of this writing.

options day trading

First thing will come in mind is, best way to day trade will be, price-action trading, here use of “Options Strategies” is out of question as that again is for positional trading, by price action I mean, using technical things like support & resistance, candlestick patterns, trend analysis, risk-reward knowledge etc to carry out trades.

So basically we are asking, is it possible to trade options like stocks? and not use traditional “options strategies” and too much rely on news analysis etc which are main tools for any positional option trader. How we use price-actions? ¬†obviously they will be used on underlying instrument and using that we put options trade.

Now let’s discuss what are the major issues with approach, first options prices tend to drop little earlier than underlying so you will always get the late entry making risk reward worse for you, when second selling options will have very awful risk-to-reward ratio, what this means is, if you get 2 point drop for some fall of underlying will get 3 point rise when underlying recovers, so selling options will force you to wait longer as you get stuck in a losing position, and perhaps convert your your trade to positional.

Third issue is options price will rarely be match their fair value. Fair value of options are calculated using Black scholes model. What this effectively may do to your trade entry is, you get under priced options sold or over priced bought.

Together all these factors makes up the returns limited even if you correctly predicted underlying movements, and unfortunately that’s a proven way to become loser in long term!