Are you looking to learn about the various swing trading options strategies? You’ve come to the right place. This in-depth guide will take you from knowing absolutely nothing about how to swing trade options to a confident state where you’re ready to start swing trading with options.
This strategy unlocks possibilities that traditional stock trading doesn’t offer. You can incorporate options into your existing strategy as a way to gain higher profits or to hedge risk.
But, there’s no doubt that options trading can be pretty complicated at first. Don’t worry – we’re going to simplify it for you. Let’s start with a quick breakdown of options.
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What Are Options?
Options are contracts that give you the right (but not the obligation) to buy or sell a specific asset at a set price before a set date. These contracts are most commonly used with stocks but can apply to other assets like commodities or indexes, too.
Unlike owning shares outright, options give you the ability to speculate on price movements with less capital up front. You can take advantage of leverage through options trading. There are two types you’ll encounter:
- Call options give you the right to buy a stock at a specific price. You’d buy a call if you expect the stock’s price to rise. For example, if you hold a call option to buy a stock at $20 and the stock rises to $35, you can either exercise the option to buy at the lower price or sell the option for a profit.
- Put options give you the right to sell a stock at a specific price. You’d buy a put if you expect the stock to fall. If the stock drops below your strike price, you can profit by selling the stock at the higher, pre-set price.
At any rate, the value of an option is tied to the performance of the underlying asset. You can profit when the market moves in your favor. But if it doesn’t, then you’re left with an options contract that’s worthless.
Still, you’re only out the premium you paid for the contract – so the losses are relatively easy to stomach compared to other types of trades gone wrong. That said, can you swing trade options?
Can You Swing Trade Options?
These contracts come with an expiration date, but that doesn’t mean you can’t exercise your options to capitalize on a short-term swing in a price within 2-3 days of purchasing your contract.
You can exercise US-based options at any point before that expiration date. Keep in mind that European options are a little different. You can only exercise your option on that expiration date.
So, can you swing trade options? Yes, but whether or not you should is another story. Let’s look at the pros and cons of options swing trading below.
Pros and Cons of Swing Trading Options
The obvious appeal of options swing trading is the earning huge returns from an option swinging in your favor. There are a few other benefits of implementing swing trading options strategies, though – like leverage.
You can leverage options as a way to help limit your risk exposure. If you’re trading a small account, you may want to consider making options part of your swing trading strategy. You’ll be able to stretch your capital further.
But are there any drawbacks or risks to swing trading options? Yes. If you buy an option for a given stock, and that stock’s price remains stagnant – the option you purchased loses value each and every day without change.
The closer you get to the expiration date without price movement in your favor, the less your contract is worth. The good news, though, is we have an option trading service that can help you avoid this.
The OptionsPro integration with VectorVest can eliminate uncertainty and increase your success rate. It helps you find the right moment to sell any option with specialized theta decay charts. You can instantly identify which stocks could yield the juiciest option premiums using powerful scans. Or, nail the highest probability trades with unique volatility studies.
We’ll talk more about how you can leverage our solution whether you’re swing trading options or selling covered calls for income. But let’s get into some tips on how to swing trade options in general below.
How to Swing Trade Options: Step-by-Step Guide to Options Swing Trading
Ready to learn how to swing trade options? It’s not as complicated as it may seem once you have a solid grasp on how options contracts work. But as we just touched on, you can make it even less stressful and more straightforward with the right tools in your arsenal.
After all, successfully learning how to make money trading options requires you to find the best stock options picks on a consistent basis. That’s why you need our stock picker app.
Choose A Stock or Security
The ideal criteria for swing trading options is finding a stock with strong short-term momentum or clear technical setups. Stagnant stocks are fine for long-term investing, but not so much when it comes to swing trading OR options trading – let alone trying to swing trade options.
You want a stock that moves, ideally with above-average volume, clear support/resistance levels, and recent catalysts (earnings, news, etc.). Volatility is your friend in options trading – it’s what creates profitable swings you can then capitalize on.
Determine Whether You Want To Purchase A Call or Put
Once you’ve found a stock you think is poised to swing one direction or the other you simply pick between a call or put contract. This is easy:
- Buy calls when you think the stock will go up.
- Buy puts when you think a stock will drop.
Make this decision based on the chart, not a hunch. Look for breakout setups, reversals, or breakdowns confirmed by price action and volume. Don’t play the guessing game, learn how to use the best stock indicators in your favor.
Pick The Exercise Price
The exercise price (also known as strike price) determines how much your options contract costs. This is the price point at which you’ll ultimately buy or sell your stock/commodity at.
When you buy a call, you hope the market price exceeds your strike price – so you can buy at a discount. When you buy a put, you hope the market price goes below the strike price – so you can sell at a premium. So, how do you determine the exercise price?
- In-the-money exercise price is one that’s better than the current market price
- Out-of-the-money exercise price is one that is worse than the current price
- At the money exercise price is right at the current market price.
Choose a strike price that makes sense for your time horizon and risk appetite. Slightly in-the-money or at-the-money strikes offer a balance between cost and sensitivity to price movements. Avoid deep out-of-the-money options unless you’re taking a low-cost, high-risk options swing trading strategy.
Determine The Expiration Date
The expiration date also affects contract price along with your contract’s value as time goes on. Typically, the longer the expiration date, the more expensive your options contract will be. But, they also limit your risk as there is more time for the price to swing in your favor.
Swing traders trade options with shorter-term expiration dates – sometimes as short as one month. After all, the basis of swing trading strategy is to capitalize on short-term swings and secure profits within a few days or weeks of opening a position.
Keep in mind, though, a shorter expiration date presents more risk. You’ll need to be confident in your belief that the price is going to swing quickly. This is why you really can’t overlook the value of OptionsPro. It helps you purchase contracts with peace of mind knowing odds are in your favor.
Purchase Your Contract & Manage Your Position
Now comes the fun part of learning how to swing trade options – waiting patiently for the price to swing in your favor so you can exercise your contract or sell it for a profit
This means monitoring charts and setting up technical indicators to help you determine when the right time to execute your options is. Set alerts for the price at which you’ll exercise your options.
The nice thing about options trading is that your risk is typically just limited to the premium you paid for the contract – unlike short trades, where the risk is unlimited. if your expiration date approaches and your contract is still out of the money, you don’t have to exercise stock options – let it expire.
An Options Swing Trade Example
You know how to swing trade options now, but a single example is worth a thousand words.
Let’s say you’ve been tracking a stock consolidating around $50, and your technical indicators suggest a breakout is coming. You decide to buy a call option with a strike price of $52.50, set to expire in 3 weeks, paying a premium of $2.
The stock jumps to $58 just a few days later and the option is in the money. Its premium rises to $6. There are two paths you can take at this point. You can of course exercise the option, buy the stocks at a discount, and then continue to hold them if you suspect more price appreciation.
OR – you can sell the contract and walk away with a $4 profit per share, or $400 per contract. This is the better option if you don’t have a long-term outlook on the stock in question.
You timed the trade based on momentum, managed risk with a short expiration window, and exited with a quick return. That’s what options swing trading is all about.
A Word on Delta in Swing Trading Options
We’ve referenced delta a few times throughout this guide on how to swing trade options but want to take a moment to explain how you can use it to your advantage. It measures how much an option’s price will move for every $1 change in the underlying stock.
In other words, delta helps you gauge how quickly your trade will react and how likely it is to finish in the money. A delta of 0.50 means the option will gain (or lose) $0.50 for every $1 the stock moves. That also implies about a 50% chance of finishing in the money.
So what’s a good delta for swing trading options? Investors typically prefer deltas between 0.40 and 0.65. That’s the sweet spot where the stock can move favorably, but not so much that premium becomes too expensive.
Delta also works like a probability tool. A higher delta boosts your chances of a profitable swing, but it comes at a cost. Understanding this balance helps you select contracts that match your expected move and time frame without overpaying for exposure.
What Indicators Should You Use for Options Swing Trading?
You know you need to do technical analysis for successful options swing trading, but let’s get more specific about the indicators you’ll want to use in your day-to-day process.
Start with Bollinger Bands to spot breakout compression and RSI to identify overbought or oversold setups. These help time your entry.
The Put-Call Ratio (PCR) is another useful tool. A rising PCR might indicate bearish sentiment and could clue you into a short-term put opportunity. Add in Implied Volatility (IV) to measure how expensive options are right now, and Volume/Open Interest to confirm liquidity so you’re not stuck in a thin trade.
All that said – juggling five indicators across multiple tickers isn’t exactly light work. The analysis can be overwhelming and inconsistent without a streamlined system. That’s why many swing traders are now using tools like VectorVest to simplify everything.
Set Yourself Up For Options Swing Trading Success With VectorVest
Whether you’re trying to learn how to swing trade options or how to sell covered calls, VectorVest provides you with proven tools to boost your success rate. We’ve been calling every major market move for 20 years and counting – and our intuitive software can help you come out on top of your trades with a high rate of accuracy.
Timing is everything when swing trading options – and that’s one of the best parts of our system. We can help you determine the right time to enter and exit positions.
But that’s not all – you also gain access to prebuilt searches with our picks for the hottest stocks at any given time. Here are some more reasons you need VectorVest and OptionsPro if you’re serious about options swing trading:
- Spot Undervalued Options Instantly: Find buying opportunities where the risk/reward ratio works in your favor.
- Sell at the Peak: Use the Volatility Range Indicator to identify overpriced options ripe for selling.
- Trade With Confidence: Probability Envelopes visually show your odds of success on any trade.
- Pinpoint the Sweet Spot to Sell: Time your trades perfectly with Sweet Spot Calculation for max premium and minimal decay.
- Flag High-Probability Setups Automatically: Scan any list of stocks for the best options trades right now.
- Master Spreads Without the Guesswork: Balance risk and reward precisely with built-in spread trade analysis tools.
- Visualize Volatility Like Never Before: Options Skew Graph highlights where buyers get bargains and sellers command top dollar
- Identify Candlestick Patterns Automatically: Built-in scanning and color-coded charts let you instantly find powerful reversal and continuation signals.
- Choose the Best Timeframes for Your Strategy: Scan for setups on both daily and weekly charts depending on your preferred pace.
It’s designed for real traders, not just professionals. You can hit the ground running even as a complete beginner. Save time, increase accuracy, and trade smarter with VectorVest.
Final Words On How to Swing Trade Options
As you can see, there are quite a few benefits to developing swing trading options strategies. You can earn impressive returns and mitigate risk. If you’re starting with a small account, this is a great way to grow your capital quickly.
Options swing trading isn’t as complicated as it may have originally seemed. We hope you feel confident in how to swing trade options now. You just need a good understanding of technical analysis to be successful with this strategy – or, play the game on easy mode using a stock forecasting website like VectorVest.
Make investing simple with our help. You can try it out today for 30-days with a risk-free trial. Or, get a free stock analysis to see how we simplify technical analysis and transform the way you trade forever.
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