Day trading futures options

Profit Potential for Day Trading Futures.

See How Much a Risk Controlled Futures Strategy Can Make.

Wondered about the profit potential of day trading futures? The scenario outlined below shows what a risk controlled strategy could make. Trading profits vary based on market conditions. During volatile times, when price moves are bigger, there's greater potential. When price moves are smaller there's typically less potential each day. Performance also varies based on the individual, and is affected by the risk/reward of each trade, win rate, and how many trades are taken.

Futures Day Trading Risk Management.

Every successful futures day trader manages their risk. Risk management is a crucial element of profitability.

Keep risk on each trade to one percent or less of the account value. If you have a $30,000 account don't lose more than $300 on a single trade. Losses occur, and even a good day trading strategy may experience strings of losses.

Risk is managed using a stop loss order, discussed in the Scenarios sections below.

Futures Day Trading Strategy.

While a strategy has potentially many components and can be analyzed for profitability in various ways, it's often ranked based on its win-rate and reward/risk ratio.

Win-rate is how many trades are won as a percentage of all trades taken. If you win 55 out of 100 trades the win rate is 55 percent. While it isn't required, having a win-rate above 50 percent is ideal for most day traders. Winning 55 to 60 percent of trades is an achievable objective to aim for.

Reward/risk determines how much is risked to attain a profit. If a trader loses five ticks on a losing trade, but makes eight ticks on their winning trades, even if they only win 50 percent of their trades they'll be profitable. Therefore, making more on winners is something many futures day traders strive for.

A higher win-rate means more flexibility with your reward/risk, and a high reward/risk means your win-rate can be lower and you can still be profitable.

Profit Potential Scenario For Day Trading.

Assume a trader has $7,000 trading account and a 55 percent win-rate. They risk one percent of their capital, or $70 per trade. This is accomplished by using a stop loss. For this scenario, a stop loss order is placed five ticks away from the entry price, and a target is placed eight ticks away.

Trading one E-mini S&P 500 futures (ES), the risk on the trade is five ticks x $12.5 = $62.5, which is less than our $70 max risk, and leaves some room for commission costs. A winning trade on one contract equals $100, or 8 ticks x $12.50.

The potential reward on each trade is 1.6 times great than the risk (8/5), as we want winners to be bigger than losers.

Assume that volatility permits a trader to make five round turn trades per day using the above parameters. A round turn means entering and exiting a trade. If there are 20 trading days in a month, the trader is making 100 trades, on average, each month.

Now, let's see how much a futures day trader can make in a month, taking into account commission costs.

55 trades were profitable: 55 x $100 = $5,500 45 trades were losers: 45 x ($62.5) = ($2,812.5)

Gross profit is $5,500 - $2,812.50 = $2,687.5.

Assume commissions and fees of $4.12 per round turn trade.

Net profit is $2,687.50 - $412 = $2,275.50.

Assuming a net profit of $2,275.50, the return on the account for the month is 32.5%, or $2,275.50 divided by $7,000). See the Refinements section below for factors that could affect this return.

Risking two percent per trade, which means the trader can trade two contracts using the same $7,000 account, the return doubles to 65 percent, assuming the same trading statistics.

While statistics make achieving a high return look easy, it isn't. Replicating these statistics in a live trading account is challenging. Few traders reach a point of making double-digit percentage returns each month.

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That said, it is attainable, but expect to put in at least one year or more of hard work and practice before seeing consistently profitable results.

Refinements.

It isn't always possible to find five good day trades a day, especially when the market is moving slowly for extended periods of time. It's also possible that during low volatility times attaining the eight tick target isn't possible, which means some trades will be exited for a smaller gain. Also, a trader exercising discretion over their trades may not always lose the full five ticks. Slight changes in profits and losses on each trade greatly affects overall profitability over many trades.

Slippage is an inevitable part of trading. Slippage is when an order fills at a different price than expected. In liquid markets, such as the E-mini S&P 500, slippage isn't usually a concern. When it occurs though, slippage affects returns, usually by increasing the amount of a loss or reducing the amount of a profit.

Adjust the profit scenario accordingly based on your personal stop loss, target, capital, slippage, win rate, position sizes, and commissions.

Day Trading Futures - Advantages and Disadvantages.

Day trading is the strategy of buying and selling a futures contract(s) within the same day without holding open long or short positions overnight. Day trades vary in duration; they can last for a couple of minutes or at times, for most of a trading session. It takes lots of knowledge, experience, and discipline to day trade futures successfully.

Advantages of Day Trading Futures.

All positions must close by the end of the day, and no positions remain overnight when day trading futures.

A futures day trader should sleep well at night as no risk exists. Most of the time, futures open at a much different price than where they closed the previous day. Price volatility means that the chances of unexpected losses or profits rise when positions remain on the books at the end of a trading session.

One can learn a great deal about the futures markets in a short period by day trading. Day traders typically make more than a few trades every day; compare that to position traders who might make only one trade a week. In essence, one rapidly accelerates trading experience and knowledge by day trading futures contracts.

Disadvantages of Day Trading Futures.

One must follow strict discipline to be a successful day trader. The temptation to make marginal trades and to overtrade is always present in futures markets.

Commissions can add up very quickly with day trading. Many day traders wind up even at the end of the year, while their commission bill is enormous.

For example, a trader with a $20,000 account that day trades one e-mini S&P contract, may have $5,000 - $10,000 in commissions at the end of the year. The day trader would have to make a 25-50% return on trading to break-even.

Most people who day trade futures are not able to earn money. A lack of preparation and disciple in usually their downfall.

Day trading can be an unforgiving game. However, for those willing to do homework, develop a plan, and stick to it with discipline, it can be a profitable venture.

Best Markets for Day Trading Futures.

The market of choice for many day traders is the E-mini S&P 500. It is a pure play on the stock market where futures traders can control around $75,000 worth of stock for about $3,500 in margin. The E-mini S&P futures are electronically traded, which makes trade executions very fast and liquid. The Dow futures, E-mini Nasdaq futures, and E-mini Russell futures are also popular among futures day traders who focus on the stock market.

The 10 Year T-Notes, soybeans, crude oil, Japanese yen, and Euro FX all have enough volume and daily volatility in their futures prices to be candidates for day trading. Each futures market has different characteristics, so one needs to study the markets before day trading to uncover and optimize techniques and develop a plan.

Volatility Is The Major Factor For Day Traders.

There are times when the benefits of short-term of day trading outweigh the benefits of long-term investing. The volatility of markets tends to dictate which approach to markets is most suitable.

I find that in highly volatile, liquid, and choppy market conditions where prices move up and down in frantic fashion throughout the day, I am better off opening and closing positions within one trading day or day trading. However, in trending markets, I have had more success holding positions overnight and trading on a medium or long-term basis. Longer-term trading can mean holding a long or short position overnight, a few days, weeks or for more extended periods. Volatility tends to be a day trader’s paradise and an investor’s nightmare. However, the lack of volatility in markets can often frustrate day traders.

Day Trading using Options.

With options offering leverage and loss-limiting capabilities, it would seems like day trading options would be a great idea. In reality, however, the day trading option strategy faces a couple of problems.

Firstly, the time value component of the option premium tends to dampen any price movement. For near-the-money options, while the intrinsic value may go up along with the underlying stock price, this gain is offset to a certain degree by the loss of time value.

Secondly, due to the reduced liquidity of the options market, the bid-ask spreads are usually wider than for stocks, sometimes up to half a point, again cutting into the limited profit of the typical daytrade.

So if you are planning to day trade options, you must overcome this two problems.

Your DayTrading Options: Near-month and In-The-Money.

For daytrading purposes, we want to use options with as little time value as possible and with delta as close to 1.0 as we can get. So if you are going to daytrade options, then you should daytrade the near month in-the-money options of highly liquid stocks.

We daytrade with near-month in-the-money options because in-the-money options have the least amount of time value and have the greatest delta, compared to at-the-money or out-of-the-money options.

Furthermore, as we get closer to expiration, the option premium is increasingly based on the intrinsic value, and so the underlying price changes will have a greater impact, bringing you closer to realising point-for-point movements of the underlying stock. Near month options are also more heavily traded than longer term options, hence they are also more liquid.

The more popular and more liquid the underlying stock, the smaller the bid-ask spread for the corresponding options market.

When properly executed, daytrading using options allow you to invest with less capital than if you actually bought the stock, and in the event of a catastrophic collapse of the underlying stock price, your loss is limited to only the premium paid.

Another Day Trading Option: The Protective Put.

If you are planning to daytrade a particular stock for short upside moves for the next few months, you can purchase protective put options to insure against a devastating stock crash.

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