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Swing trading, baby! It’s all about buying low and selling high, or vice versa if you’re feeling short. We call these price fluctuations “Price Swings” – that’s where the term “Swing Trading” comes from, ya dig?

For all you beginners out there, options trading is often used as a way to leverage your swing trading game. You buy call options when prices are low, then sell ’em for a big gain a few days or weeks later. Same goes for put options, but in reverse. But here’s the thing – a lot of these newbies learn the hard way that even if the stock moves in the direction they predicted, they can still lose big bucks in options swing trading.

Why, you ask? Well, there are some problems with options that they failed to take note of. Let me break it down for ya.

1) Strike Price

See, there are a ton of options out there, each with different strike prices for all the optionable stocks. Most beginners go for the cheap out-of-the-money options that give ’em high leverage. Out-of-the-money options are those with strike prices that are higher than the stock price for call options, or lower than the stock price for put options.

The problem with buying out-of-the-money options for swing trading is that even if the stock moves in the direction you predicted, you can still lose everything if it doesn’t exceed the strike price of your options. That’s right, if the options expire out of the money, they’re worthless. And that’s how most beginners lose all their dough in options trading.

So, you gotta weigh the rewards and risks, my friend. Out-of-the-money options give you big rewards if the stock makes a big move, but if it doesn’t hit that strike price by expiration, you’re screwed.

2) Expiration Date

Here’s the deal – options have a set expiration date. Unlike swing trading with stocks, you can’t hold onto options forever. So, if you’re wrong, you lose money real quick when that expiration date rolls around.

Swing trading with options is like a race against time. The faster the stock moves, the more profit you make. Luckily, most optionable stocks have options across different expiration months. If you think the stock is gonna move fast, go for options with a nearer expiration month – they’re cheaper and have higher leverage. If you want more time, go for a further expiration month, but keep in mind it’ll be more expensive and have lower leverage.

3) Extrinsic Value

Extrinsic value, or “premium,” is the part of an option’s price that disappears completely at expiration. That’s why out-of-the-money options are worthless when they expire – they have no built-in value.

Here’s the deal with extrinsic value – it erodes over time and when volatility drops. Eroding over time is called “Time Decay.” The longer you hold onto an unprofitable option, the cheaper it gets, until it’s worthless. So, swing trading with options is all about speed. The faster the stock moves, the surer you are of making a profit. Unlike swing trading with stocks, where you make money as long as it moves eventually.

When anticipation for a stock drops, that’s when extrinsic value erodes due to “Volatility Crunch.” Like, if there’s a big expected move in the future, like an earnings release, the options get more expensive. But once the news hits, that extra cost disappears completely. That’s volatility crunch, baby. And that’s why beginners lose money swing trading through earnings releases – the extrinsic value gets hit so hard that even if the stock moves in the predicted direction, there’s no profit left.

So, when swing trading with options, you gotta get a bit more complex with your strategy if you’re speculating on high volatility stocks or events. Gotta pick stocks that make moves before time decay chomps away at your profits.

4) Bid Ask Spread

Options can have wider bid ask spreads than their underlying stocks, especially if the options aren’t heavily traded. A big bid ask spread means you start off with a big loss, especially with those cheap out-of-the-money options. So, it’s crucial to trade options with tight bid ask spreads to make sure you have liquidity and a small upfront loss.

Swing trading with options can be super profitable, my friend, as long as you keep all these issues in mind and select your options wisely. Happy trading!

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Ihab Salloum