If buying and selling stocks is like trying to win at a game of checkers, then trying to trade options is like a game of chess by comparison. The activity is more complicated, and you’d better be able to select the most strategic move as the game develops.
In some ways, learning to select the right strategy is a lot easier for option traders than for chess players. That’s because there are three numbers, available to practically any option trader, that carry key information needed to identify the right strategy. The three numbers are derived by the option greeks: Delta, Gamma, and Theta. To understand them you’ll need a quick explanation of what they mean and how to read the numbers they generate.

Delta:

This variable generates a number between 0 and 1.00. It designates how sensitive an option is to a one dollar change in the price of the underlying stock. Delta scores can be understood by comparing a $1.00 move in the price of a stock with whatever the Delta number is. That number will tell you how much the option will change in price if the stock price changes by one dollar.

For example, if stock XYZ is trading at $100 per share, and I decide that I want to buy a call option at the $100 strike price (an at-the-money option). Suppose I pay $2.50 for that option which expires in two weeks’ time. Now I might be curious to know how much the price of the option will change if XYZ goes up to $101 per share in a single day. The Delta value can tell me what to expect.

Suppose the Delta value for the call option that I bought is .52. This tells me that when XYZ reaches $101 in price, my option should be pretty close to $3.02 cents per share (2.50 + .52). The price of my option doesn’t go up penny for penny compared to the stock price, because some of that move is already priced into the option to begin with. In this case, I paid $2.50 at the outset, so the option seller made a bet that the stock won’t move more than $2.50 in my favor over the next two weeks. If the stock goes up by one dollar, the seller of that option isn’t terribly worried. There is still another $1.98 to be made on this trade from the seller’s perspective (2.50 – .52).

The less time an option buyer has on the contract they have purchased, the higher the Delta score tends to be. Options that are at the money tend to be scored around .50, options further in the money are above .50, and options that are out of the money are below .50. Delta scores on call or put options of .5 or greater are good for traders who want to make a swing trading play and want to leverage a short-term move most effectively.

Gamma:

This variable designates how sensitive the delta score is to a one dollar move in the stock price. It is used to determine how rapidly an option will increase its sensitivity to the move of the stock. A low gamma value (something less than .10) will mean that the delta value will change slowly as the stock prices moves in the same direction as the option (up for calls, down for puts). A high gamma score means that the option will rapidly become more valuable if the stock moves favorably.

For example, suppose XYZ’s 100 call option, (we’ll name this one option A), has a gamma score of .06. That means that when XYZ moves from 100 to 101, the 100 call option will change its delta value from .52 to .58. Gamma scores tend to increase if the price of the stock is lower, or If the time to expiration is less. But suppose XYZ were not priced at $100, but instead it was priced at $10, and instead of two weeks to expiration, it might have only 1 day left before expiration.

If those conditions were true, XYZ’s $10 call option (we’ll name this one option B) might have a delta of .50, but it might also have a gamma of .48. That means that if XYZ moved from $10 to $11 in the next hour or so, the delta score could jump to .98. That means that from that price point or higher, that $10 call option would gain value just as quick as the share price of XYZ. So you can see why call option B would gain value much more rapidly compared to call option A.

Options with a high gamma score are excellent for short-to-intermediate-term strategies. This means that when you are looking to risk a small amount of money on a low-probability bet that has the potential for high-stakes opportunities, you’ll want to find an option with as high a gamma score as you can get.

Theta:

This variable designates how much the passage of time affects the price of an option. More specifically it designates how much value an option loses with the passage of one day’s time. Unlike Gamma and Delta, which connect the price of the option to the price of the stock, Theta is related to the price of the option alone.

Theta scores are negative numbers, so the highest score is 0. The closer an option is to expiration, the more negative the theta scores become. The closer an option is to being at the money, the more negative the theta scores become as well.

For example, if XYZ stock is $100 per share, and the 100 call option has 14 days left before expiration, the theta score might be something like -.07. This means that after one full day, the value of the option will decrease by seven cents, assuming the price of the stock holds constant. That same 100 call option that has two days before expiration, might have a theta score of something like -.45, meaning it will decrease by 45 cents in one day all other things equal.

Options with higher theta scores (anything above .10) are good candidates for short-to-intermediate time strategies that seek to collect value from the passage of time. These strategies are more likely to begin with the selling of options, rather than the buying of options. Strategies such as vertical credit spreads or iron condors are a good match because they have comparatively larger theta scores.

There are several other Greeks such as Rho, and Vega, and many others. Each can help an option trader better identify what an option can best be used for. But the most important are Delta, Gamma and Theta, because those three have a more potent impact on option prices than the others.

That’s why Options Academy uses these three option greeks as labels for the three different trading styles an option trade can start from. Each of the trading styles seeks to maximize the use of that option Greek by using strategies that go with the proper option Greek. Below is a summary list of strategies aligned with the three most influential option greeks. It matches the list of strategies associated with each of the three trading styles: Delta, Gamma and Theta.

This simplified approach to option trading divides a trader’s approach into one of three different trading styles labeled with the names of influential variables in the option world: theta, gamma and delta. Each of these styles is focused on a different anticipated win percentage, with a tradeoff of the size of anticipated gains. Although highly experienced traders make use of all three trading styles, beginning traders do well to choose one of the styles that best suits them. Here is a closer examination of Theta style trading.

Theta style trading favors small, consistent winners with an overall high win percentage. This style trades off large profits for consistency. Theta style traders tend to have a personality that gravitates towards positive reinforcement, making it an excellent style for new or inexperienced traders. This style of trading risks losing more than the anticipated size of gains they generate.

What is Theta?

“Theta” is one of the four primary “Greeks” that traders use to describe and analyze various risks to an options trade at any specific point in time. Theta is measured as a value in dollars, and tells us how much an option premium loses (or gains) each day through expiration. For this reason, theta is also known as the time decay of an option. This time decay, or theta, is not linear. Theoretically, the rate of decay will accelerate for the option as expiration approaches.

What does this mean in relation to the Theta style trading?

In options, time decay works against the option buyer, but works in favor of the option seller. This is the crux of Theta style trading. It is a strategy that favors the selling of options – collecting premium and allowing time decay (or theta) to work in Theta style traders’ favor. This is also called being “theta positive.”

Since this trading style uses time as a weapon, Theta style traders typically prefer a trading time frame of one to six weeks (though this can vary). This allows for time decay to chip away at the value of options sold. This also means that theta style traders tend to possess a natural patience.

This style aims for a win rate of 70% to 90%. Since the profits are lower, Theta style traders aim to collect profits more frequently. The tradeoff with such a style is that when losses inevitably come, they are considerable. Remember, this style risks 2 to make 1. Because of this, theta style traders do their best to eliminate mistakes and prefer cautious, consistent profits over big, flashy wins.

There are many ways to sell options. Theta style trading focus on these established strategies:

• Naked Puts
• Bull put spreads
• Bear call spreads
• Iron Condors
• Calendar and Butterfly Spreads

We’ll go further in depth with each of these strategies later. The important thing to focus on is that Theta style traders have a number of ways to utilize time to their advantage.

This simplified approach to option trading divides a trader’s approach into one of three different trading styles labeled with the names of influential variables in the option world: theta, gamma and delta. Each of these styles is focused on a different anticipated win percentage, with a tradeoff of the size of anticipated gains. Although highly experienced traders make use of all three trading styles, beginning traders do well to choose one of the styles that best suits them. Here is a closer look at Gamma style trading.

Gamma style trading is the options style that takes many small, well-defined risks to achieve larger profits, albeit with a lower expected win rate. Gamma style traders don’t take rejection personally and are emotionally equipped to handle many losses so that they can relish in big wins.

What is Gamma?

“Gamma” is one of the four primary “Greeks” that traders use to describe and analyze various risks to an options trade at any specific point in time. Gamma is a second derivative of an option’s price that measures the rate of change in delta, another of the Greeks, over time. As a gauge of the velocity of potential change in delta, gamma can be considered “acceleration” (or deceleration) to delta’s “speed”.

How does this relate to the Gamma style trading?

Gamma works in the favor of long options holders. It accelerates profits and decelerates losses. As options approach expiration, gamma increases, which can provide drastic swings in option value. Gamma style traders profit from these drastic swings, which are far less common, but much more profitable.

This trading style prefers a shorter to intermediate trading time frame. For shorter term options this time frame can be for a few minutes to a few days. Because of this time frame, this trading style needs movement, up or down, or volatility in the market for success.

Gamma style traders aim for a win rate of 35% to 45%. Since the win rate is on the lower end of the spectrum, Gamma style traders expect two to four (or more) times profit than risks taken. The lower win rate makes it necessary for these traders to be able to shrug off losses so they can uncover the next big opportunity. Remember, this style risks 1 to make 2 (or 4, or more).

This trading style aims to swing for the fences by utilizing both call and put options that are out of the money. These calculated risks generally have an inexpensive entry point, but a smaller chance of success. When they do succeed, the profit can be substantial.

This simplified approach to option trading divides a trader’s approach into one of three different trading styles labeled with the names of influential variables in the option world: theta, gamma and delta. Each of these styles is focused on a different anticipated win percentage, with a tradeoff of the size of anticipated gains. Although highly experienced traders make use of all three trading styles, beginning traders do well to choose one of the styles that best suits them. Here is a closer look at Delta style trading.

Delta style trading is the options style that carefully balances risk and reward to have a better than even chance of winning. Traders of this style are detail oriented and are great at research and controlling risk. Delta style traders are meticulous and analytical. Delta style traders care less about the size of their winning trades than they do about just winning the trades.

What is Delta?

“Delta” is one of the four primary “Greeks” that traders use to describe and analyze various risks to an options trade at any specific point in time. Delta measures the sensitivity of an option‘s price to movement in the underlying stock. Put another way, delta is the amount an options price is expected to move based on a $1 change in the underlying security.  

Delta is also commonly used for determining the likelihood of an option being in the money at expiration. For example, if an out-of-the-money call option has a delta of 0.30, it’s said to have a roughly 30% chance of expiring in the money. By looking at delta this way, it gives the trader a good understanding of the likelihood of the option having value at expiration, if they choose to hold it that long.

What does this mean in relation to the Delta Trading style? 

With an understanding of the relationship between delta value and the likelihood of an option being in the money at expiration, Delta style traders are more effectively able to balance their risk to reward tolerance. This strategy effectively “swing trades” options – taking calculated risk at support or resistance levels to exploit the natural swings of underlying stocks.

Traders who specialize in Delta-style option trading may employ either buying or selling strategies, and will typically rely on shorter timeframes for their intended outcomes. If they can win trades the majority of the time, they will likely trade profitably over time. For these traders the time frame is not as important as merely winning the trade. 

This style aims for a win rate of 45% to 65%. Since there is a calculated balance between risk and reward, Delta style traders expect a higher win rate than Gamma style traders and a lower win rate than Theta style traders. Same for profitability – Delta style trading falls somewhere between the Gamma and Theta styles. If Theta style trading was considered “Win Frequent”, and Gamma style trading was considered “Win More”, then Delta style trading would be considered “Just Win”.

There are many ways to “Just Win”, but for the most part, Delta style traders focus on these strategies:

• Calls and Puts
• Debit Spreads
• Bull call / Bear put spreads
• Calendar and Diagonal spreads

We’ll go further in depth with each of these strategies later. The important thing to remember is that Delta style traders take calculated risks and utilize whatever options strategies necessary to “just win”.

Day trading refers to the practice of buying and selling a security within a single trading day. While common with stocks and foreign exchange (forex), it is possible to profitably day trade options contracts. Day trading requires an in-depth understanding of how the markets work and various strategies for profiting in the short term. Day trading uses many of the same tools utilized in other forms of trading, albeit on a much more compressed timeline. Intraday trades can typically be completed in minutes, and sometimes as quick as a few seconds.

Requirements to day trade
The Financial Industry Regulatory Authority (FINRA) is an independent, nongovernmental organization that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States. Its stated mission is “to safeguard the investing public against fraud and bad practices.”

For day traders, the most important rule from FINRA is the Pattern Day Trading rule. A pattern day trader (PDT) is a regulatory designation for those traders or investors that execute four or more day trades over the span of five business days using a margin account. The number of day trades must constitute more than 6% of the margin account’s total trade activity during that five-day window.

If this occurs, the trader’s account will be flagged as a PDT by their broker. The PDT designation places certain restrictions on further trading; this designation is put in place to discourage investors from trading excessively. Pattern day traders are required to hold $25,000 in their margin accounts. If the account drops below $25,000 they will be prohibited from making any further day trades until the balance is brought back up.
It is absolutely still possible to day trade with an account of less than $25,000, however, exceeding four day trades in a five-day span would result in a PDT restriction.

Why day trade options?
Day trading options enable investors to leverage the bullish or bearish intraday momentum of a stock without having to actually purchase shares of the underlying security. For example, say that stock XYZ trades for $145. Buying 100 shares of stock XYZ would cost a trader $14,500. An options contract for XYZ would trade for significantly less than the total price of 100 shares. Perhaps a trader does not wish to allocate that amount of money towards XYZ, but still wishes to capitalize on the daily movement of the stock. This is why day trading options can be a fantastic alternative.

The reduced cost basis of day trading options opposed to shares can allow traders to diversify, thus increasing investment opportunities. This allows a trader’s capital to go further, increasing profit potential. Another factor is volatility. As demand for options increases, implied volatility will rise. Options that have high levels of implied volatility will result in high-priced option premiums.

Sounds great! What’s the downside?
The tradeoff is that with options, there can be reduced liquidity in options markets. This can widen the spread between the bid and ask prices, requiring a larger movement than may be expected for options to become profitable. Another factor to consider is time value, or theta. Price movement of an option may be limited by the theta value of an option. However, with these drawbacks taken into consideration, savvy traders can adjust their day trading plans accordingly.

Where to begin?
First, a more-than-general knowledge of how options and markets function is necessary. An educated trader will usually always have the advantage of those who have not done their due diligence. Next, just like regularly trading options, day traders require a strategy. Much like the trading styles we teach you about at Options Academy, options day traders employ strategies that work for them.

Many of the same tenets of the Options Academy trading styles are applicable to day trading options. It is possible to mimic the Theta, Gamma, and Delta trading styles on a smaller, quicker scale. Options day traders use many of the same tools developed for regular trading – research, planned entry/exit, technical analysis – in conjunction with timing to remain profitable. Day traders also diligently practice risk management.

Successful day traders pay attention to international and futures markets before the market opens, to get a feel for the directions of the markets headed into the US open. The US often dictates the direction of the world markets, so it is sensible to wait a little while for the market to settle before entering the first trade of the day.

Just a few of the most popular stocks to day trade are: Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), and the SPDR S&P 500 trust ETF (SPY). These stocks are all very liquid and have plenty of volume. For example, let’s say you wish to day trade the SPY. Before the market opens, you see that there is news that you consider bearish. Futures are down and there does not seem to be any news that will change bearish sentiment.

This would be an opportunity, after watching how the SPY trades for a bit (as markets can be especially volatile at open) to buy puts on the SPY, or sell calls on the SPY. A common strategy for option day traders is to buy or sell at-the-money, or just out-of-the-money calls or puts. These options have a greater likelihood of having a large change in value.

Wrapping Up
Day trading options is a great way to capitalize on the bullish or bearish momentum of an underlying stock. Options allow traders to leverage this momentum for a significantly smaller amount of capital than buying shares of the underlying stock outright. While possible to apply a similar approach to day trading options as the individual trading styles we teach you about at Options Academy, the timeline is much smaller, requiring adjustments.