Stock Trading and Other Things

Day trading SPY options: How can I do this better? (Long question)?

(Note: I have real money experience with options going back to 2000, first covered calls in my IRA and then long calls in my cash account though no day trading experience with real money. I have the 25K to park in an account to satisfy the pattern day trader rules and another 10K to make the actual contract purchases.)

I have a job that allows me to keep an eye on the real time stock market. Starting in January I started playing with the Virtual Trading engine at OptionXpress, daytrading options on SPY. My strategy is rather modest; I buy 5-10 ITM contracts, either put or call depending on market direction, and sell when I see the trend reverse. I chose 10 contracts because I believe that with an order size that small, if I submit a sell order at the bid it should fill immediately unless the market is moving very fast allowing me to lock in a profit if the trend reverses. I open one position at a time, I never leave my desk with an open position and I am 100% cash at market close every day. I use SPY because being a basket of 500 stocks it is buffered from sudden drastic moves in price giving me time to get out of a position with minimal loss if the price goes the wrong way on me. My immediate goal is $100 after commissions per round trip, a target that requires only a $0.15 move in option price. I don't always guess right on direction, 4 out of 5 is typical, and I am netting between $400 and $500 a day on 6-7 round trips. My $5000 initial play money stake has grown to about $15,000 since 1/19 when I started doing this seriously. I won't get rich doing this but over the course of a year that is an extra person's worth of income for my family. If it lets me do nothing more than pay off my house and fund future college for my 3 kids it is worth it.

Now that I have proven to myself that this seems to be a reasonable strategy I am trying to understand what I can do better and am now in the area of "I don't know what I don't know." I know about Level 2 quotes but if these are something that can help me I am not clear how to use them. I know that there are all sorts of indicators that technical traders use but I don't know if these scale down to the day trading level. I know about the existence of the Greeks, and while I understand roughly what the numbers and equations mean, I don't know if these will help me on positions lasting 15 minutes or less.

My main interest in posting this question is to find out if there are tools I can use to help me make better choices about getting in or out of a position or tell me more about what the market is doing. This strategy seems to be working okay and if I can translate this to real money I will consider myself successful. I don't want to be greedy but I certainly would like to know if I can do what I am already doing more effectively.

I spent time on 888options and optionetics.com but it seems much of the content out there deals with strategies like spreads, butterflies and condors, things that simply don't apply to what I am doing. I know there are options day traders, even some specializing in SPY, who read these questions, and I'd be appreciative if I even had a list of books or even just some things to go research and learn about that you have found helpful in your experience.

Thanks for reading this far and any help y'all provide.
I definitely understand the problem with fills; in fact, I asked a question about that here the other day. I had noticed that I could put in a sell at a price like 3.10 and a minute later see a bid/ask spread of 3.15/3.20 with my sell order still open. My only thought was "What the ****?!" I was told by another answerer that in reality, on an order that small an ask below the bid would never stay open on something as liquid as SPY.
Regarding filling at the mid, on SPY I could live with this. The options on SPY move enough intraday that even if every buy order filled at the ask and and sold at the bid I'd still make money because I am looking for moves of .15 on options that can move .30 or more in a short time. I've gotten good enough at picking the trend direction that I will buy options that are 3 or 4 points ITM. This gets me my .15 or more move with only a small move in the price of SPY.

Public Comments

1. i have lots of information regarding options trading.

contact me on my email id by accessing my profile.

2. Sounds like you have a developed pretty good strategy.

I hate to rain on your parade, but the first thing that people notice when they move from virtual/paper trading to real money trading is... the fills.

Most paper accounts automatically fill at the mid price (between the bid and the ask.) That is not necessarily where the market is.

The SPY trades relatively close to the mid, except at times of extreme volatility - which is when you want to get filled. I normally put an order in at the mid. Sometimes it gets filled immediately, but it might take 5 or 10 minutes. I might have to move my price by $0.05 if I can't find the market.

I remember freaking out in Oct 2008, I could not get fills anywhere near the mid (in my real money account.) The market was moving violently and I couldn't get in or out of trades.

I wanted to puke.

Personally, I love the SPY and trade it a lot. It's the most liquid equity on the market.

Day trading options can be a decent strategy if you can stay on top of it.

I would not discount the use of spreads - they are another very powerful way to provide leverage and protection.

Here's the deal with spreads: A stock can move up, down, or sideways. Spreads allow you to make money in any one or two directions: up; down; sideways; up or down; up or sideways; OR down or sideways, Plus, they help you limit your maximum risk.

I would also suggest that you learn the Greeks. Some traders understand them implicitly - maybe you do, too. You need to understand the concepts behind them.

Stock pricing is effected by one thing: the stock price (duh!).

Option pricing is effected by stock price, volatility, strike, interest rates, and dividends. That is 5X level of complexity. If you are in-and-out in a relatively short timeframe, it can minimize the impact of the Greeks, but you are still vulnerable to them. You need to learn them.

I would suggest that you open an account with thinkorswim. They have the most powerful platform on the market. There has been a veritable exodus of people leaving OX for thinkorswim or tradeMonster (another good platform).

Professionals spend thousands per month to use platforms similar to thinkorswim... but TOS is free. Plus, they have tons of free education and support. The thinkorswim platform has a steep learning curve, but the effort pays off. You will be amazed at the complexity and features. Listen in to the free Trader Lounge Wednesday chats at 4:15 pm ET. Today is John Person (as in Person Pivots.)

The charting is the most amazing free platform available. They offer over 200 technical studies and even have their own code which allows you to tweak or create your own custom studies. They also have some unique "scans" like the Sizzle Index that looks for abnormal options volume.

With regards to education: I am a firm believer in continuously improving yourself. You are going to learn a lot on your own and through books and free seminars. But, you are also going to make a lot of mistakes.

If you want to do it right, it takes time and effort. I was trading options on my own for years. I made... and lost a lot of money making stupid mistakes.

I have been through a stock and options education program called Spread Trade Systems. It costs about 10k. It's a fantastic program and is not a "get rich quick" scheme. It's like going back to college - there's like 42 live classes (web), live chats, home study materials, and precorded session. It takes about 5 hours per week and will take you close to a year to get trough it. They also offer a money back guarantee if you are not profitable. I researched lots of companies and found them to have the best reputation and their students were fanatical (now I am one!) If you want to contact them, feel free to use my name (Eric Hale). You can contact me if you want to ask questions.

* When I tell people that I trade options, they usually say "That's risky!" I normally say that "So is using a tablesaw. But, if you know what you are doing and you take the proper safety precautions, it's the right tool." (I have a good friend who cut his finger off using a table saw.) The key is to know what you are doing. If you just run to the HomeDepot buy a table saw, take it home, and plug it in, you might lose a finger, too. *

I am not trying to imply that you don't know what you are doing. But you are here asking questions. So, you obviously want to learn more.

Sorry to ramble so much, but I hope that was helpful.