Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Options as a Stock Alternative for Swing Trading

By

Four reasons short term traders should consider options.

PrintPRINT
Swing trading works well with options for many reasons, including being able to execute the strategy with less risk and more leverage.

Swing trading is an attractive strategy for short-term traders. Similar to day trading, the swing trader normally expects to profit from three- to five-day short-term price swings. The theory is based on the observation that short-term price movement is invariably an overreaction to whatever is taking place -- earnings reports, rumors, or even market-wide movement. These overreactions correct within that three- to five-day time frame, and swing traders seek entry and exit signals.

Most swing traders use stock, but options may be a better choice. This is especially true for options expiring within a couple of weeks because, unlike most other options strategies, the lack of time value is advantageous when the option is slightly in the money.

There are four specific advantages to using options for swing trading:

1. Risks are lower. The market risk of owning stock is a well-known factor in buying and selling stocks. A single option gives you control over 100 shares, for costs between 5% and 10% of the cost of 100 shares of stock. You can never lose more than the cost of buying the option; and although that is 100%, you have much less cash at risk. This market risk is always present whether you buy and hold stock for the long term, or take profits whenever they materialize. Options in a swing trading strategy reduce market risks instead of increasing them.

2. There's no need to go short. A big risk in short selling when using stock is that you have to go short to play the downside. At the top of the price swing, you expect a reversal and a decline. With stock, you have to go short to take a position, which is a huge risk. For this reason alone, many traders swing trade only at the bottom of a price decline, just to avoid shorting stock. This means they miss out on half of all possible swing trades. When using options, you can buy a comparatively cheap put and get the same swing action with much lower risk.

3. Options give you greater leverage. Because options require 5% to 10% of the cost of buying stock, you can use the same amount of money to control between 10 and 20 times the stock in swing trades. This means you can involve more stocks in the strategy and even expand your positions more through multiples of two or more options.

4. Options allow you to diversify your swing trading strategy. By swing trading a higher number of stocks, you get more effective diversification, which further lowers your risk. The greatest problem in swing trading with stock is that diversification can become expensive and, thus, impractical.

You can't get away from risk completely; and options are exceptionally complex vehicles for any activity. But if you're knowledgeable about the options market and you like the idea of swing trading, options deserve another look.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE