Sunday, January 6, 2013

daytrading, smalldog style

a daytrade is one whose duration lasts less than a day. buy in the morning/sell in the afternoon. there are firms out there that will try to tell you that you need to have 100k or more in a portfolio margin account, that you need to be throwing 50-60k into each of these daytrades to purchase gobs of shares of stock and you need to watch the positions like a hawk. all not true. here's my recipe for a daytrade, smalldog style:
  1. buy an at-the-money option expiring in the current week on a liquid etf. i like spy but qqq and iwm work just as well.
  2. after your purchase, send a gtc limit order to sell at a 50% gain.
  3. sell at the end of the day if the position still exists. 
size adjustment: start by trading 1 contract. on each 50% winner increase size by 1 contract. on each unprofitable trade reduce size by 1 contract.
 
optional intraday adjustment: if the option drops 30% from the entry price then lower the asking price on the limit order to the break-even price (net of commissions.) a scratched trade is not a losing trade. however, i recommend not watching how the sausage is made, at least some of the time.

update 2/16/2013 - a small variation of this technique can convert this into an effective swing trading strategy. buy the option early in the week and if it does not hit the target price then simply let it ride.  the market action dominates theta decay in these soon-to-expire options (a.k.a. gamma scalping.) the trick is to be trading small enough that the full loss is a normal acceptable loss.

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