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The Perfect Swing Trading Vehicle

02/20/2015 8:00 am EST


Michael Thomsett

Founder, Thomsett Publishing Website

One great advantage to using options for swing trading is not only in the profit potential, but also in the way they reduce your market risk, writes Michael Thomsett of

Swing trading is a description of strategies designed to move in and out of open positions as quickly as possible (usually two to five 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. Limits based on cash and margin. 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. Special benefits. 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. Risk advantages. Options are less risky because you can never lose more than the premium paid for a long position.
  4. Bearish swings with long positions. 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 three-five-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.

By Michael Thomsett of

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