Day Trading the S&P 100 with Options

As a large number of Indexes have Options you have to look for highly liquid options and you need an index with a range of daily price movement that is sufficient to create trading opportunities for taking profits.

The S&P100 has an average daily price range of about 4 points. It is very seldom that you get a daily price range of less than 2 points.

During a calendar month you can expect to see several days with a price range of 7 to 8 points. Days with a price range of 10 points or more are relatively scarse or very infrequent. An S&P100 price movement of 5 to 6 points is typically accompanied by a DOW price movement of plus minus 100 points.

The safest way to trade the S&P100 is simply to buy a call or a put, depending on which direction you anticipate the index price to move. The recommended option is the front-month, slightly out-of-the-money call or put. Depending on how close it is to the expiration date, the price of this option will be in the range of 2 Dollar to 7 Dollars.

The magnitude of the Delta of this Option will increase, thereby improving your chances for profit. A reasonable target is to capture about 60 percent of the price movement of the index for the day. On a typical trading day when there is a 4 point price movement in the S&P100, you are looking to participate in a movement of about 2.5 points.

With a delta of .40 this then suggests that you are looking for 1 Dollar per share gain in the price of the option. Take note that with slippage the gain is more likely to be about .80 cents to .90 cents per share. So if you are trading 10 contracts, this will translate to a profit of 800 Dollars to 900 Dollars. Commissions will deduct from that profit by 50 Dollars or a little less.

Ideally you would like to limit the average loss on your losing trades to less than the average profit on your winning trades. Realistically speaking this is difficult to achieve. If you set your stops too tight in an effort to curb loss, you will be prematurely taken out of many trades that would have ended up as profitable trades.

For the typical 4 point price movement in the S&P100, a good target is to hold the loss on your losing 10 contract trades to 1,000 Dollars including commissions.

Based on the average profit and loss per trade, you will need to have at least 2 winning trades for every losing trade to make day trading the S&P100 your worthwhile.

For every 3 trades involving a 4 point move in the S&P100, you need 2 winners for a profit of 1,500 dollars to offset one loser with a loss of 1,000 Dollars. So that it produces a net gain of 500 Dollars on the 3 trades!