Options 201 — My Day Trading Strategy

SpockTradez
20 min readDec 26, 2024

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For those of you who have been following me for a hot minute, this will be an easy transition for you. For all the new recruits, I highly recommend you first read through all my Star Fleet Academy posts first so you have a foundation for what I’m about to go over but not re-type because there’s a perfectly good link with all you need to know.

I also found a Mastermind course that was fantastic for learning all the basics like Support and Resistance and an intro to trading Options (and I’m not just saying this because I have an affiliate link). At the very least, I highly recommend joining a trading community, the only one I’m in is KC Trades Premium Discord.

Now as with stocks you can Day Trade or Swing Trade. Since I’m still learning and there’s the factor of Decay involved with Options, I’m only focusing on positions I’ll enter and exit within the day. As I learn more about them, I’m sure I’ll move into holding them over time. But for now, I’ll only be discussing Day Trades. The strategy will probably end up being the same for Swings.

*NOTE: For regular trading account you are limited to 3 Day Trades per week. In order to qualify for a Day Trading account and avoid this limit, you need a minimum balance of $25k in your account. Again, for now I’m only Paper Trading as I learn so this isn’t an issue.

Real-Time Quotes

Now before we even look at charts, it is imperative that you ensure you have the most up-to-date info as possible. Timing is everything when it comes to trading but it is especially crucial when it comes to day trading. Therefore you gotta be sure that you’re getting as Real-Time price quotes as possible. Most charting software charges extra for this.

UGH!? You mean I gotta pay for stuff wah wah wah! YES, you gotta spend money to make money. Imagine if a carpenter wanted to build a house but quit because he had to to buy a hammer! Besides, you’re getting all these articles for free so quit whining.

If you don’t already use Stockchart.com please CLICK HERE to use my referral or if you prefer Trading View CLICK HERE for that referral.

These referrals really help me bring you all this juicy knowledge for free and it doesn’t cost you an extra dime! :)

Alright, you’re still miffed about spending money. Fine. Here’s how to get the charts for free. If you have a Schwab account, you can use the free charts in Think or Swim but you’ll have to make sure to enable Real-Time quotes by contacting customer service and signing some terms of service type agreements. And after you enable them for your account be sure you actually have them turned on!

Click the “Application Settings” cog wheel in the upper right corner. Go to General > System and select “Real-time (no delay)” from the drop down menu. Click Apply Settings to save.

NOTE: If for some reason it doesn’t work, I found a glitch in their system that’s easy to fix. Go to the “My profile” tab (top left in the above screenshot) and check your profile name. Mine was my two initials and apparently real-time quotes cannot be enabled unless your profile name has a minimum of 3 letters.

Yeah, I dunno either…. moving on!

CHART INDICATORS

SPOILER ALERT: All the indicators I use are free. Hooray! 🥳

Now I’ve mentioned the KISS method here before — Keep It Simple Stupid and Day Trading is no different. So in order to keep this is as simple as possible, I’m do exactly what I for Swing Trading but with one minor change — instead of SMAs I use all EMAs.

As mentioned in my other posts, Exponential Moving Averages weigh more recent data as more important and therefore signal earlier. (I’m actually curious to see how this works for Swing Trades as well, but that’s for another day and another post). Let me show you with a real-world example…

I back-tested my trading strategy on this chart for $MRK:

Above is Friday’s chart for MRK where I was back testing if the 5/20 Crossover method works for Day Trading. As expected, yes it does. (Remember this is all fractal and works the same on any time frame).

But I since I was on a shorter time frame now — the 5 Minute chart instead of the 1 Day chart — and timing is crucial, I wanted to see if switching from SMAs to all EMAs would change my entry and exits points. So here’s the same exact chart but with all Exponential Moving Averages…

Notice how the Moving Average Crossovers happen a bar or two earlier? This minor change gives you extra room on each side of the trade, which in options can be big percentage points!

So. The first three indicators to add to the chart are the 5, 20, and 200 EMAs. Everything else is the same as the Swing Trades — RSI up top and MACD at the bottom.

ENTRY & EXIT SIGNALS

Let’s look at two options paper trades I took Monday day in 3M ($MMM)...

(AGAIN, SINCE I’M STILL STILL LEARNING OPTIONS AND TESTING MY STRATEGY, I’M ONLY PAPER TRADING AT THIS POINT!)

Signal #1 that a Reversal is about to happen shows up on the MACD with a crossover to the downside.

Notice my Moving Average and MACD line colors are customized. The 5 EMA and MACD lines are GREEN and the 20 EMA and Signal Line (on the MACD indicator) are RED. This way I can see whichever color is on top is the direction of the Trend. Green on top means up, Red means down. KISS — Keep It Simple Stupid.

Okay, so the MACD signaled that it’s moving to the downside. But still I waited…

Signal #2 ... Price then closed below both EMAs… but still I waited.

Signal #3 … The 20 EMA crossed above the 5 EMA… I ENTERED!

I’m included time stamps as both a trading journal and so you can follow along.

Trade #1

(10:48) I took a PUT position for 20 options.

Specifically the Nov 29th Puts at a $128 Strike Price for 91 cents … or written more simply: 11/29 128p $0.72

Now, for Targets you can use Support and Resistance like in Swing Trading as illustrated below….

While I watch this decide when to Take Profits aka Trim aka Scale Out, I also like to use Profit Percentages as Targets.

(11:26) I first trimmed 10 options at $0.82 for a profit of 13.89%.

(11:30) I sold 5 more at $0.88 for 22.22% profit.

(11:39) Sold 3 more at $1.05 for 45.83% profit.

(11:52) Sold 1 more at $1.25 for 73.61% profit.

(12:06) I closed out the position with the final option at $1.05 for 45.83% profit.

Total paper profit*: $365 from an initial position of $1,440 for a total profit of 25.35%. Not bad for about an hour’s worth of work!

That’s a lot of Monopoly money! 💰

*Don’t forget you gotta take out the fees. While “No Fee” stock trading has become a thing, that’s not the case for Options. Fees are on both sides of the trade and the cost varies by broker.

But did you see my mistake?

If you notice the timestamps compared to the chart, you’ll see I broke my own rules and exited early. I exited before the MACD signal crossed back over to the Upside (Green over Red), before Price closed back above the EMAs, and before the 5 crossed above the 20.

And while you’ll think this is a good thing because if I waited the price would have gone down more resulting in less gains on that last runner. But it’s not an issue about gains, it’s an issue about Discipline.. Plan the trade and trade the plan. The entire purposes of having a Trading Plan is to use it, follow it, stick to it. When we start deviated from our plans is when we get sloppy. This usually happens when you get emotional. And the whole namesake of this trading journal is Spock for a reason — trade without emotion.

That being said, we don’t want to be so rigid that we become a slave to our plan. We want to be flexible and learn to read what the charts are telling us.

As I test this Trading Plan on Day Trading Options, I will refine it as needed. In this case, my current hypothesis is “Maybe the MACD Crossover is the true signal to look for, not the 5/20 Crossover, for entering and exiting a position.” Or perhaps I’ll try scaling in. Buying a 1/4 of a position whe the MACD crosses over, then another 1/4 when price closes above the EMAs, then the final 1/2 when the EMAs cross over each other.

The only way to know, is to keep testing it and keep paper trading until I have a rock solid system that is repeatable and reliable but also that I have disciplined myself to stick to it — Plan the trade and trade the plan.

The great thing about Options is you can take both sides of a trade, so I was able to switch my Puts position into a Calls position and ride the stock back up!

So let’s look at the other trade in 3M ($MMM) I took and hour later when the 5 actually crossed the 20 signaling a Trend Reversal…

Trade #2

Still Trading the same chart. I entered the trade by buying 20 Call Options.

(13:08) 11/29 130c at $0.38 — cost is $760

(13:21) Sold 10 at $0.42 for a profit of 10.53%

(13:46) Sold 5 at $0.44 for a profit of 15.79%

(13:59) Sold 1 at $0.46 for a profit of 21%

(14:02) Sold 2 at $0.53 for a profit of 39.47%

(14:26) Sold the last 2 at $0.50 for a profit of 31.57%

Do you see my mistake?

Yep. I did the same thing AGAIN! I sold before the chart told me to because I panicked on the pull back (I also had to go run errands and didn’t want to leave the position open — but’s that just what I’m telling myself to justify it. In the end, had I listened to the chart it actually wouldn’t have told me to sell at all the rest of the day (though I probably would have trimmed another when the RSI went over 70 if I’m being honest).

Now, I still made $132 for 17.37% gains, so it wasn’t a failure.

But unlike Trade #1, not following the plan didn’t lead to saving gains, it led to a massive loss of them — Plan the Trade and Trade the Plan!

UPDATE:

By the way, here’ the update on this 3M ($MMM) chart. Not only did it signal on Monday a crossover to the upside, as of Wednesday, it is still ripping up with no crossover signaling an exit:

Before we move on, I want to reiterate this point one more time by showing how not reading the chart fully caused a massive wrong move…

(13:08) I entered a position of 20 Options — 11/29 50c $0.32 ($640 cost)

(13:47) Sold 10 at $0.37 for a profit of 15.63%

(14:25) Sold 10 at $0.28 for a loss of 10.53%

I made a whopping $10 profit but when you factor in the fees it was a bust.

So, did you see the mistake?

That’s right, the 5 and 20 crossed over BUT I didn’t look at the MACD which DID NOT crossover! Not even close. I shouldn’t have panicked and exited the trade, I let emotions take over. I got out right before that giant green candle. I didn’t Trade the Plan.

So again, for those in the back…

PLAN THE TRADE AND TRADE THE PLAN!

Here’s a chart for you to practice on. Go through this chart for Home Depot ($HD) from Tuesday and see if there are any points according to this trading strategy, and if there are, mark where you’d enter and exit any Calls or Puts. Answer is at the end of the post.

Time Frame Confirmations

It’s also wise to look at the chart on other time frames beside the 5 min to see where things are at and where they might be heading. It’s always worth seeing what the 15 min, 1 hour, 4 hour, even the Daily chart looks like just to get a scope for the bigger picture.

BIG NOTE WHEN LIVE TRADING

Don’t fall for the trap of getting in too early. I fell for this multiple times when trading live. Here’s the scenario…

You’re on a 5 minute chart. The MACD crossed over and you’re waiting for the 5/20 crossover to confirm AND IT DOES on the current candle! So you hit the big shiny Buy button and you’re in! … But wait, what’s this? No! It’s reversing. Price is going in the wrong direction. Oh, crap! The 5/20 aren’t crossing anymore. The candle closes. No crossover. Now it’s ripping the other direction. Nooooooo!

The lesson: Wait for the candle where the 5/20 crossover is happening to close and lock in the crossover, then get in! Don’t worry about leaving money on the table if you got in a few seconds or minutes later. It’s far better than losing money if the trade goes the wrong way. Remember:

Patience is key!

Example…

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RISK MANAGEMENT

I don’t know how many times I need to say this but being a good trader is not about maximizing your gains but about minimizing your risk.

Read that again. 👆

You can’t be afraid to leave money on the table. You’re not gonna buy every low and sell every high. And you’re definitely not gonna have a 100% win record with zero losses. What you can do is work to minimize those losses.

Perfect is the enemy of Good.

The sooner you accept that you will undoubtedly have losses, the sooner you’ll advance your trading skills. Your goal should be to become a good trader not a perfect one.

If you need still some convincing of this concept, here’s an example…

Let’s say part of your trading plan is to only take trades with a Risk/Reward ratio of 1:3 meaning for every $1 you Risk losing (aka being stopped out) you have a potential Reward (aka Gains) of $3. Even if only 50% of your trades are successful, i.e. hit your Targets, you’re still a profitable trader!

Super Simple Example:

Let’s say your account is $10,000 and your trading plan is for $1,000 per trade (or 10% of your account).

Each trade has a 1:3 Risk/Reward ratio which equates to $100 potential Risk to $300 potential Reward. (So for each trade you’re risking $100 of a $10,000 account which equates to a Risk of only 1% of your total account per trade).

If you make 10 trades and only half are successes and half are failures, your Profits and Losses for the trades are…

Successes: 5 trades at +$300 (Profit) = $1,500

Failures: 5 trades at -$100 (Loss) = -$500

TOTAL: $1,000 Gains!

You never want to do a 1:1 Risk/Reward trade, the lowest you’d probably want to go is 1:2 but I’d only do that if the signals were strong to the upside.

TradingView (and I’m sure other charting software) have super simple tools for calculating your Risk/Reward. Here’s an example from the 3M ($MMM) chart:

I used the Shorts Risk/Reward tool to calculate the ratio for my Puts. You can see I’ve set the entry at the 5/20 crossover. The Stop is at previous Resistance. And the Target is at the 20 EMA. This trade has a Risk/Reward ratio of 1:2.97. Perfect!

Setting Your Stops

Preventing excessive losses can be handled by putting in Stop Loss orders on your trades. I have a whole section about this in the Star Fleet Academy.

However, this is the one area I’m still working on for my trading plan and here’s why…

Options move at a different rate than the stock price, it’s not a 1 to 1 move. Especially when you factor in Decay. For this reason every second counts. So if you have a Stop Loss order in but then your price hits your Target, you have to cancel the Stop Loss order. Then enter the Target order. These valuable seconds can literally cost you money.

So what can you do?

Well, some traders I’ve observed set their Stops mentally and just keep watch. This is fine if you only take enough trades where you can effectively manage. I’m currently trying to only enter 1 or 2 trades at a time.

Alternately you can set OCO orders which I also discuss in the Star Fleet Academy.

Let’s walk through one way to feasible do this…

For this position let’s say we buy 10 options at $1.00 each. Our first target is 15% gains and our stop is -5%. We plan to scale out or trim 1/2 the position (5 contracts) when we hit that 10% Target. Here’s how I might set my initial orders…

  • Order #1 — OCO for 5 options: $0.95 Stop Limit price OR $1.15 Limit Order
  • Order #2 — Stop Limit order for the other 5 options at $0.95

This was if the trade moves against us — we only lose our 5% Risk. If the trade moves in our favor — we cash out 5 options for the $1.15 order and make 15% gains. Then we cancel Order #2 to bring those options back into play.

Now a big rule that you need to drill into your head is…

Never let a Green trade turn Red!

“Green Light… Red Light!!”

What I mean is we currently have all or options in the green. Rather than leave Order #2 at our original Stop Loss, we cancel it and set up new order which will protect our gains. As I go over in the Star Fleet Academy, once a Target is hit that becomes your new Stop Loss. Let’s say we want the next Target to focus on about a 1/4 of the position. Our new orders are:

  • Order #3 — OCO for 3 options: $1.15 Stop Limit OR $1.20 Limit Order (20% gains)
  • Order #4 — Stop Limit for the other 2 options at $1.15

This way if the trade turns against us, we exit the position with 15% gains on all options. If the trade goes with us we trim 3 shares at 20% gains. We then repeat this for the next Target, or simply leave those last two at the current Stop Loss and let them run.

If doing this, have the Cancel and Replace order queued up so you can quickly put the order in when you get the point where you’d like to exit.

Again, this is my current thought on setting up my trades, I have not tested it yet and have currently just been doing it manually while Paper Trading. What I did find out thought that’s really cool, is that Think or Swim allows you to place a buy order with an OCO that sets up as soon as your order is filled! You just need to right click the Option Ask Price and select “Buy Custom” (see below):

One Last Rule

When I actually make the switch from Paper Trading to Live trading, one rule that will be part of my trading plan is:

If I have two unsuccessful trades in a row, I will end trading for the day.

Maybe I’m off, maybe the market is. But I want to control my emotions and not fall into the trap of trying to “revenge trade” my way back to break-even or into gain. Best to just pack it up and call it a day and try again tomorrow.

Recap

  • Looking for 5/20 crossover and MACD crossover to confirm each other.
  • Don’t fall for the trap of trading a crossover on an active candle.
  • Price closing above/below both MAs can be an early signal but not always.
  • Check trend on multiple time frames to get the full picture.
  • Look for Risk/Reward of 1:3 or higher (or even 1:2 as minimum)
  • Set Targets and Stops by percentages or Resistance/Support levels.
  • Look for RSI extremes (over 70/under 3 is a great spot to take profits) as they can signal a coming Reversal.

Some key basics of being a good trader are:

  • Don’t trade with emotions, trade with logic.
  • Make a Trading Plan and stick to it!
  • Don’t be afraid of losses, they come with the territory.
  • Avoid style drift — don’t keep hopping around to different trading strategies hoping to find “the perfect one” that doesn’t take any work.
  • Avoid confirmation bias — don’t try to rationalize what you want the chart to tell you! Read what the chart is actually telling you!

UPDATED NOTE

I’m still experimenting with using EMA for both the 5 and 20 versus SMAs and my traditional 5 EMA and 20 SMA — but I’m also going to test using the 9 and 21 EMAs. I’m sure I’ll be doing a follow-up post on which is better, but in the meantime, feel free to test out different combinations of your own and share your results or thoughts in the comments.

Progress Tracker

As a fun little Christmas gift, I’ve made this little Options Progress Tracker you can download here and print out. The idea is to print this out and hang it above your desk then fill in the bars when you reach each milestone and write the date on the line below it. Again, use this for Paper Trading first!

Final Thoughts

I’ve always found the best way to trade any stocks or options is to KISS — Keep It Simple Stupid and one of the main ways to do that is by minimizing your indicators and sticking to the basics. Don’t use indicator because you saw some YouTube Finfluencer using it unless you understand what it’s telling you.

Most indicators are lagging indicators showing you what has already happened not what is going to happen. There is no magic bullet indicator that can predict the future — and even if there was a) you’d never be able to afford it and b) it would break the entire system and everything would collapse.

Again, your goal should be to become a “good trader” not a perfect one. Read what the chart is telling you, not what you want it to say. There is a lot of information right in front of you.

Repetition is key!

I suggest finding a handful or stocks and keep studying those charts. You’ll start to learn the ways they behave, how fast the price moves, and get to know their Support and Resistance levels even on a naked chart.

I suggest starting with a dozen or so big moving stocks — things like SPY, QQQ, IWM, AMZN, NVDA, AAPL, META, HD, MMM, TSLA... See how their options move in conjunction with their price. Avoid low price stocks that require VERY large price moves to get the option to move a mere one cent. Again, Keep It Simple as you’r starting out. Nothing is more discouraging when starting something new than jumping right into the deep end. Enjoy the shallows for a bit. Get used to the water. And one big piece of advice:

Don’t compare someone else’s middle to your beginning!

Even if you do find a trader on Twitter (X whatever) or YouTube, keep in mind that they’ve been doing this for years whereas you are just getting started. They were were you are now when they first began. So don’t compare where they are in their journey now to where you are right now.

Have fun and enjoy the process of learning a new skill. And remember, it’s about the journey not the destination.

Trade long and prosper!

🖖

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SPECIAL BONUS!!

Congratulations on sticking through it to the end! 🎉

As a reward, here’s the link to my custom SpockTradez “Vulcan Mind Meld” indicator. The indicator is currently private so use it - save it as a Favorite and then add it to your chart from the Favorites menu.

It’s not perfect by any means.

By default it is set to show the 5 EMA and the 20 and 200 SMAs with crossovers for the 5 and 20 but you can switch them each to any MAs or any time period. Only the first two MA inputs will show crossovers, the third will only show the line for reference. I also wanted to include the MACD crossovers as a confirmer so I’ve combined two indicators in one in order to filter out some of the noise of “false” signals (e.g. when the MAs crossover but the MACD has not). It does however filter out lat signals as well (the MAs crossover but the MACD crossover is late) but I built in a feature which you can toggle on and off to show or hide these late signals. Also a part ofit is the ability to show labels when the RSI crosses into extremes. Again you can toggle on/off the setting to just show the first crossover candle label or all labels when the RSI is extreme.

The best part is the Vulcan Mind Meld combines all of these features into 1 indicator which saves you spots on TradingView’s indicator limit for free accounts! Wow, such awesome!!!

If you want to thank me, you can buy me a cup of coffee here. ☕🙏

*NOTE: Depending if you have your TradingView chart set to Extended Trading Hours (ETH) or Regular Trading Hours (RTH) you’ll get different signals.

Do some testing to see which setting you prefer. It might even vary from stock to stock. Observe how they behave and take notes. Also be aware when you set an alert of which mode you are on because it will set the alerts for only signals on that type of chart.

You can switch between the two modes by clicking the setting next to your clock at the bottom right corner of your chart (see below) 👇

Oh and as an extra bonus, if you want a MACD indicator that shows crossovers so you can keep an eye on when reversals are approaching, check out my MACD X-over indicator, also free.

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SpockTradez
SpockTradez

Written by SpockTradez

trading without emotions 🖖

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