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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT Press); and "Options for... More
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  • 4 Advantages To Using Options To Swing Trade 0 comments
    Feb 18, 2013 9:27 AM
    academics,education,parks,playground equipment,playgrounds,recreation,schools,swing sets,swings

    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 over-reaction to whatever is taking place - earnings reports, rumors, or even market-wide movement. These over-reactions correct within that three- to five-day timeframe, 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 is 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 trader only at the bottom of a price decline, just to avoid shorting stock. This means they miss out of 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 cannot get away from risk completely; and options are exceptionally complex vehicles for any activity. But if you are knowledgeable about the options market and you like the idea of swing trading, options deserve another look.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at to learn more.

    I also offer a weekly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. All it requires is your e-mail address. Join at Weekly Newsletter I look forward to having you as a subscriber.

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