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Options In A Swing Trading Program – Lower Risks, Better Leverage

Swing trading is a description of strategies designed to move in and out of open positions as quickly as possible (usually 2 to 5 trading days), take small profits, and move to the next one. Most traders use stock for swing trading; but options just make good sense as the vehicle of choice for swing trading. When you swing trade using stock, there are several problems:

1. You are limited by your cash and margin maximum, whereas options are cheaper and for a small fraction of the cost, allow you to control price movement in 100 shares. Thus, you have great leverage but risks remain low.

2. The combination of option diversification and leverage cannot be matched, especially when you realize that these features do not increase risk. Most forms of leverage (like margin borrowing) increase your risks, but not so with an options-based strategy.

3. Options are less risky because you can never lose more than the premium paid for a long position.

4. You cannot play both sides of the swing without high risks. Stock-based swing trading demands shorting stock at the top of the swing, which is expensive and high-risk. With options, the long put is a much safer and easier bearish play.

In summary, just the basic strategy of opening long calls at the bottom and long puts at the top, makes swing trading flexible, affordable and low-risk. It is also one of the few strategies where using soon-to-expire, at the money or slightly in the money options make the most sense. Swing traders move in and out of positions in a 3- to 5-session time frame. Options at or slightly in the money that expire in a month or less have very little time value and are most likely to respond to the underlying price movement.

This is one of many low-risk trading ideas every options trader can use. The great advantage to options for swing trading is not only in the profit potential, but also in the way this reduces your market risks.

Option-based swing trading can be accomplished in a very low-cost environment. For example, setting up synthetic long stock positions at the bottom of the swing, and synthetic short stock positions at the top is a great way to create no-cost or no-cost swing trading positions. While both synthetics require one side to be short, the risk is likely to be manageable if you also rely on strong reversal signals and their confirmation.

I have written a book on this topic being published by Palgrave Macmillan, called Options for Swing Trading Release date is September 3, 2013 and I hope you will keep an eye out for it. In this book, I considered all of the possible combinations of long and short options with a keen focus on risks and potential profits. Following is the complete table of contents:

Introduction: Problems of Risk in Most Trading Systems

Chapter 1 - Options: Trading Basics

Chapter 2 - Swing Trading: The Basics

Chapter 3 - Dangerous Waters: Risk Inherent in Comprehensive Swing-Based Strategies

Chapter 4 - Marginal Potential: Leverage Limitations in Swing Trading with Stock

Chapter 5 - Elegant Solutions: Options to Address the Risk and Leverage Issues

Chapter 6 - In and Out: Entry and Exit Criteria for Swing Trading

Chapter 7 - Powerful Timing Tools: Expanding Swing Signals with Candlestick Reversals

Chapter 8 - Flexing Your Muscle: The Power of Options Close to Expiration

Chapter 9 - Swings Maximized: Timing the Swing with Ex-dividend Date

Chapter 10 - Strategy # 1: Long Option Approach, a Basic Solution

Chapter 11 - Strategy # 2: Long/Short Call Strategy, Uncovered Short Side

Chapter 12 - Strategy # 3: Long/Short Call Strategy, Covered Short Side

Chapter 13 - Strategy # 4: Long/Short Call Strategy, Ratio Writing on the Short Side

Chapter 14 - Strategy # 5: Long/Short Put Strategy

Chapter 15 - Strategy # 6: Short Option Strategy

Chapter 16 - Strategy # 7: Synthetic Option Positions Strategy

Chapter 17 - Strategy # 8: Multiple Contracts and Weighting with Ratio Calendar Spreads

Chapter 18 - Strategy # 9: Expanded Iron Butterfly Swing Trading

Epilogue - The Big Picture: Swing Trading and Your Portfolio

End Notes



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