By David Adams
I don’t doubt the legion of day traders who claim great success with options and stocks. But neither of these investments meets the criteria for a great day trading instrument for me.
Why?
The real issue in day trading stocks for me is the lack of leverage available to maximize profits. Regulation T is currently set at 50%, which means your margin account must contain at least 50% if the net value of your holdings at all times. You have some leverage, I suppose, but not enough to satiate my appetite for profits.
Generally speaking, stocks are not nearly as volatile as the index futures contracts, and the one essential prerequisite for earning profits, substantial profits, is volatility. In other words, if the stock doesn’t move substantially, you are forced to wait until it does. I don’t hold any day traded equities overnight, so commission costs are a real concern in trading stocks. No, I need something with some real volatility to day trade.
You might argue that Penny Stocks provide the needed price movement to day trade. They do, as a matter of fact. But many penny stocks are of dubious value, and getting accurate information about a penny stock can be an arduous adventure. Further, the market maker in a penny stock might well be the company itself, or proxy market maker closely tied to the penny stock company. The end result can be some fairly wide bid/ask pricing, which is very common. No, I want publicly traded investment instruments with a high degree of transparency for my trading.
Options are a wonderful way to hedge a current holding in your portfolio, but they can be less than adequate for a novice trader, or even an intermediate trader. There are some very adept traders who quite well with options, but generally speaking, my experience with options traders finds a very unhappy crew. With good reason. There are many variables to deal with in options trading; strike prices, expiration dates, price decay, to name a few. I don’t like the odds, and options traders are often disappointed in their results. For years we read about former baseball great Lenny Dykstra and his genius in options trading, ads trumpeted his acumen in this field….until he declared bankruptcy a few months back, 60 million in the red. Case closed.
Futures give me an instrument with adequate liquidity, a transparent market, and plenty of price action to profit. Of course, because there is plenty of price movement should not be a promise of profits. You have to be on the right side of the price movement to make money, and that chore can be difficult. But the potential is there, and I have made a living many years in the futures markets with good success. I cannot say my endeavors with stocks and options, in a day trading sense, are nearly as successful.
I would say that I do buy and hold a small basket of stocks, but I am concerned, in this article, with strict day trading, and stocks don’t provide me with enough price movement to profit in a way I find acceptable.
About the Author
I write mainly about financial topics, specifically daytrading the emini contract, and many of my more technical techniques can be found at my blog, The Fractal Futures Trader.
