I know the words “day trading SPY options” stink of a shady casino in Las Vegas. But what if it could be done relatively safely and without risking your life savings in the process. The truth is it is very possible to trade without insane amounts of risk and for those of us who are happy earning small profits consistently, stick around this is just for you.

As an added bonus, imagine how much better you’ll feel not having to constantly worry over your investments. Day trading SPY options won’t keep any of your hard earned capital tied up and waiting for the next market crash. Get in, get out, get on with whatever you were doing.

In the next few paragraphs I’ll detail my process and best practices for day trading SPY options.

Let’s get in to it!

Day Trading SPY Options – All in the Process

  1. Chart Setup
  2. Indicators
  3. Market Charts
  4. Analysis
  5. Options Chain
  6. Entry/Exit Criteria
  7. Stop Loss Criteria

If you find a way to master each of those 7 areas you are in for a great time day trading options. Fail to do so and you’ll be reminded why 90% or more of traders lose money.

But let’s stay in order here as we work through this options day trading system, of sorts. First we have to get our charts setup for success.

Multiple Chart Setup on ThinkorSwim

While it isn’t a requirement, it may help when setting up your charts if a dual or even a three monitor setup is available. It just makes seeing the screen easier and avoids consistently opening or closing apps which can get annoying. However, it is fully possible using only one monitor and for this reason I’ll detail my setup using just one monitor as well. For the curious, I’ll include a screenshot of my three monitor setup also.

Day trading SPY options chart setup
Flexible Grid on Thinkorswim for SPY Options Day Trading

From left to right. First create a watchlist and copy the options code for both a put and a call. This will allow for both bullish and bearish positions to quickly be entered or exited. As a side note, if you prefer to trade another options strategy, you can select the type of spread from the trade tab and copy that code into the watchlist.

Next, create a chart grid with four separate charts and, if you’re using Thinkorswim, a fifth chart area with the chart deactivated from the right hand menu. Instead select active trade or big buttons. I prefer the big buttons but many prefer the active trader window and it’s all a matter of preference.

Finally, I clear off each chart to keep it as bare as possible. I don’t want five thousand lines covering up the price action on any of the four charts. As can be seen from the image above, I chose to have the SPY chart take up the lion’s share of screen real estate. However, that is just another preference.

If you have questions about the setup process please feel free to reach me in the comments below or view these images for details about each chart. Additionally, here is a Youtube video from ShortTheStrike that documents another viable day trading setup. Just below is my three monitor setup as well, for those interested.

Three Monitor Chart Setup for Options Day Trading
Three Monitor Chart Setup for Options Day Trading

Options Day Trading Indicators

The first image below is what I absolutely prefer to avoid. Honestly, I cannot see how anyone is capable of trading with so many bells and whistles covering the chart. I wouldn’t ever be able to find a trade and would likely have a seizure trying to digest all the information. However, I think it’s important to share because thousands of traders do actually trade this way and I’m sure some are even successful.

Indicator Overload
Day Trading Options – Indicator Overload

As you can see, there really is no clear picture of what’s actually happening with the chart. I don’t even know what all these mean much less try to use them to make a simple up or down decision but I include it so you don’t let it creep in on you as well. If we’re honest, we’ve all fallen victim to allowing our charts to clutter up in a similar manner.

Instead, I prefer to keep it simple and use just three indicators on my options day trading charts. From the image below, you’ll notice the blue line (9 Exponential Moving Average), the pink line (200 Simple Moving Average), and the volume profile fitted to the left side of the chart. To get the same look you’ll have to adjust some settings but I’ve found this to be simple and effective in my own trading.

Chart Indicators for Options Day Trading
Indicators for Options Day Trading

Market Internal Charts

For those new to trading, you may not be familiar with the following charts. These indicators of sorts help paint a picture at any given moment about the sentiment of the overall market. Trading SPY options is essentially trading the overall market so you want to be entering a bullish position as the market gets stronger or a bearish position as the market weakens.

The three charts I use in conjunction with the SPY chart are;

  1. $ADVN – NYSE Advanced Issues
  2. $DECN – NYSE Declined Issues

The first chart, ADVN, highlights the number of assets trading in the green at that moment. The next, DECN, highlights the opposite, which assets are trading in the red at that time. The final chart, TICK, is used to indicate on a large scale the number of stocks “ticking” higher or lower. As you may already know, to place a bullish trade I would want the declining chart (DECN) moving lower, the advancing chart (ADVN) moving higher, and the tick chart (TICK) bumping higher. The opposite would be true for a bearish position. In any case, here is the image from above again so you can get a closer look at each of the charts mentioned above.

Day trading SPY options chart
Flexible Grid on Thinkorswim for SPY Options Day Trading

Analyzing the Trade

Using the chart just below, try to determine which direction the stock will move within the next hour.

Options Day Trading Analysis
Options Day Trading Analysis

Were you able to generate a thesis?

This is what I see, in bullet format;

  • SPY is at a resistance area and suggesting bearish
  • 9 EMA – suggesting bullish
  • 200 SMA – suggesting bullish
  • ADVN is suggesting bullish
  • DECN is suggesting bullish
  • TICK is suggesting bearish

But which direction is correct? Most indications point to more bullishness ahead but the market internals, especially the TICK chart suggest a bearish or possibly some rangebound trading is on the horizon. If you weren’t concerned with the pattern day trading rule (PDT) you may decide to take a bullish position since most indications agree that a bullish move is likely. However, for those in a similar situation to my own, I would avoid a trade at this time until SPY was at a firm support level.

Below is what actually happened 1 hour later.

Bullish Options Day Trade
Bullish Options Day Trade on SPY

As suggested, notice the small blue arrow? That was price from the first image at about $440 before trading as high as $442 just an hour later. For the sake of perspective. Here’s what that small $2 move could have earned on a 1 lot trade and a 10 lot trade.

SPY 1 Lot & 10 Lot
Top line is 1 SPY Contract. Second Line is 10 SPY Contracts.

Not bad for 1 hour of work that required only a few mouse clicks. Obviously, the 10 lot required more capital at risk but I only added that to highlight the ease with which large sums of money can be accrued relatively quickly.

Regardless, I look for most of the indicators to be in agreement before I place a trade. However, if I were trading in a cash account or didn’t have to concern myself with the PDT rule I would have likely taken this trade since I could determine from the indications that a move higher was probable.

For those interested, here is an interesting video documenting a similar style of options day trading.

Which Option is the Best for Day Trading?

Largely, this will be determined by each traders preference. For myself, I try to get into and out of a move relatively quickly so I don’t want to trade a contract with 60 DTE. That just wouldn’t make sense for this style of trading. With so much time to expiration the contract price wouldn’t move as much as those contracts with less time to expiration.

Therefore, I prefer to trade at about the 10 DTE mark. I prefer that range because I feel like I get sufficient movement from the contract without the theta decay that could impact even nearer expiration contracts.

For example, consider the 1 lot and 10 lot example from earlier. This is the outcome of trading 1 lot on the 10 DTE contracts versus the 3 DTE contracts. I included the puts to highlight the impact theta has on the trade if the directional assumption is incorrect and the trade results in a loss.

SPY Options at 10 DTE versus 3 DTE
SPY Options at 10 DTE versus 3 DTE

First, notice that the 3 DTE call earned a much higher percentage return. Therefore, if the directional assumption is accurate and the trade works out for a profit the reward will be much greater compared to the capital at risk. However, dollar for dollar, the 10 DTE earned about $10 more for the same move but required twice as much capital to initiate.

But look at the 3 DTE put that resulted in a loss. You’ll notice that this put lost more than the 10 DTE put even though the 10 DTE required much more capital to initiate. For this reason is why I feel the 10 DTE contracts make the most sense for this style of trading.

Again, it will come down to preference but I think I’ve made reasonable case for why trading with a few extra days could make sense when day trading SPY options.

Entering & Exiting a Trade

For you to determine each of these you’ll need to understand yourself as a trader to know what makes the most sense for your financial picture. However, rather than attempt to uncover the endless possibilities I’ll simply share my rationale for entering and exiting my own trades.

I can assure you, I don’t complicate this.

To enter the trade I prefer to see SPY price cross over and close above/below the 9 Exponential Moving Average with the market internal indicators suggesting the same move.

To exit the trade I maintain a strict percentage rule. Generally, I prefer 4% as a profit target and 4% as a loss target. As a risk/reward profile this is 1:1. I’ve gone as high as 10% but that requires a rather large move for day trading purposes. Typically, to get a move of 10% on a contract that costs around $700 you’ll need to be patient as the price moves but I much prefer to be out with a small profit, faster. Furthermore, this 4% rule is based on the options contract price, not the underlying asset (SPY) price. Just be sure you’re aware of the difference.

Stopping the Adverse Move

One of the best reasons to day trade SPY options is liquidity. Honestly, there are probably 100 better assets to day trade options on but none compares to the liquidity in SPY. Because of this, I’ve not had any issue getting into or out of a contract at the current option price. Trade a lesser liquid stock and you’ll see what I mean. Certainly a unique sting to a losing position that you can’t exit while the loss continues to grow larger

As mentioned in the previous paragraph, I maintain a strict 4% stop loss rule and generally of the trailing stop loss variety. I’ve setup my chart with the big buttons to include a custom order template which you can learn more about at this OptionBoxer video. That video will walk you through setting up a custom order template and highlight the trailing stop loss function.

For me the trailing stop loss makes sense to avoid a winning position turning into a losing position. Just know however, it isn’t uncommon for a trailing stop loss to be triggered “suspiciously”. Because of that, If I’m day trading SPY options I much prefer to be monitoring the position throughout the trade. However, this is my preferred method when I can’t sit in front of the computer while the trade is ongoing.

Day Trading SPY Options Safely

First, every trade placed can lose. For this reason, it’s important to always maintain strict risk or capital management criteria. However, once you’ve determined your process similar to the steps highlighted here you’ll be on your way to enjoying the options day trading ride. But be warned, options day trading is a double edged sword. Just as easily as the profit comes, it can go.

With that, thank you for reading this post. If you have any questions, again, reach me in the comments below. I look forward to hearing from everyone.

But until the next post.

God bless and Take Care,