About Varun:
Varun Pothula is a Quantitative Analyst at QuantInsti. He along with Rajib Ranjan Borah and Euan Sinclair has played a key role in curriculum creation of options trading module for EPAT. Varun’s academic credentials include a Master’s in Financial Engineering from WorldQuant University and a Bachelor’s in Mechanical Engineering from Vellore Institute of Technology, India.
Prerequisites
There are no prerequisites, but if you’re new to options trading, reading Basics of Options Trading Explained, which covers fundamental concepts such as option types, pricing, and key terminologies—creating a strong foundation for more advanced strategies and risk management.
Many traders choose intraday trading to profit from quick price moves and take advantage of the leverage brokers provide on the capital.
Intraday trading with options offers similar benefits, where larger positions can be traded with relatively small capital through options premiums. The trades are entered and exited often in minutes or hours within the day. However, this approach also comes with specific and unique risks due to rapid changes in options premiums due to intraday price and volatility changes.
In this blog, we will explore how to approach intraday trading with options, common strategies, risk management techniques and common pitfalls to avoid. This blog provide ways to approach intraday trading of options with a few strategies that are widely used such as scalping, volatility breakouts, and gamma scalping.
This blog covers:
- Understanding Intraday Options Trading
- Intraday Trading Equities vs Options
- Popular Intraday Options Trading Strategies
- Scalping with Options
- Buying Options on Volatility Breakouts
- Trading Mean Reversion of Volatility
- Intraday Gamma Scalping
- Risk Management for Intraday Options Trading
- Execution and Trade Management
- Common Pitfalls and How to Avoid Them
- Frequently Asked Questions
Understanding Intraday Options Trading
To trade options, a solid understanding of options Greeks and the factors affecting options premiums is crucial. Specifically for options intraday trading, you should know implied volatility (IV), delta, gamma, and theta decay.
Unlike equities, the prices of options (premiums) are influenced by the underlying asset price, implied volatility and time decay.
1. Implied Volatility (IV): Measures market expectations of future volatility, impacting option premiums.
When implied volatility is high, it means the market expects the stock to make big price moves in either direction. On the other hand, if implied volatility is low, the stock is expected to have smaller, more predictable price movements, with less chance of sudden, unpredictable changes.
Check out the blog on Implied Volatility (IV), this blog covers the basic understanding, calculation, use and challenges. Along with tips for the traders to overcome challenges.
2. Delta: Represents the sensitivity of an option's price to changes in the underlying asset. Delta shows how much an option's price will move in response to a $1 change in the underlying asset's price during the day.
In intraday trading, if you're using an option with a low delta, like 0.05, even if the stock moves $1, the option's price will only change by $0.05. That means you won't see much movement in the option's premium, even if the stock is moving. So, if you're expecting significant premium change over the day,, low delta options might not be the best choice since they don’t react much to price swings.
This video is part of the premium course on Options Volatility Trading by Dr. Euan Sinclair on Quantra.
3. Gamma: Gamma measures how much an option’s delta changes as the price of the underlying asset moves. While delta shows the sensitivity of an option’s price to price changes in the underlying asset, gamma tells you how much delta will change as the asset’s price shifts. Essentially, gamma gives you insight into how stable or unstable the option’s delta is as the market moves.
For example, if an option has a high gamma, it means its delta will change significantly as the underlying asset moves. This can result in the option’s price moving faster and making larger swings in response to price changes in the underlying asset. On the other hand, an option with low gamma will have a more stable delta, meaning its price won’t change as drastically as the underlying asset moves.
For example, if you’re holding an option with a high gamma, a small move in the stock could cause a bigger change in the option’s delta, leading to larger swings in the option’s premium.
4. Theta Decay:
Theta decay refers to the loss in an option's value as time passes, especially as it gets closer to the end of the trading day. Even if the price of the underlying asset doesn’t move, the option's premium will decrease because there's less time for the option to become profitable. This effect is most noticeable for options with short expiration times, like those expiring the same day or the next day.
Understanding these key factors that influence options premiums is important to execute intraday trades of options efficiently.
Intraday Trading Equities vs Options
While both equity and options intraday trading involve quick decision-making, they differ significantly in execution, risks, and strategies:
Leverage & Risk: Options offer greater leverage than stocks, meaning traders can control larger positions with a smaller investment. However, this also increases the risk of complete premium loss.
Time Decay: Options lose value over time due to theta decay, unlike equities, making long positions more challenging to hold.
Liquidity & Execution: Stocks generally have higher liquidity, while options liquidity varies across strikes and expirations. Low liquidity can lead to wider bid-ask spreads and slippage.
Price Movement Sensitivity: Options prices fluctuate based on delta, gamma, and IV changes, requiring a more complex approach to risk management.
Volatility Impact: High volatility increases both risk and reward in options trading, whereas stock traders primarily focus on price direction.
Which is better for intraday trading?
Equities: Better for beginners due to lower complexity and risk. Suitable for traders comfortable with price action and technical analysis.Options: Suitable for advanced traders who understand the Greeks and volatility. Offers higher leverage but comes with more risk.
Common Intraday Options Trading Strategies
The following are some commonly used strategy themes for intraday options trading.
1. Intraday Scalping with Options
Scalping in intraday trading of equities is considered a high-risk strategy because it doesn’t always involve deep analysis of the asset’s price, trend, or market conditions. This makes it even riskier when using options for intraday trading. However, selective scalping by understanding and monitoring the dominant sentiment and direction of the underlying asset can help identify potential scalping opportunities while managing risk.
Traders usually focus on highly liquid options, typically at-the-money (ATM) or slightly in-the-money (ITM), because these offer the best liquidity for scalping. To spot good opportunities, option scalpers rely on technical indicators like Volume-Weighted Average Price (VWAP), moving averages, and the Relative Strength Index (RSI).
Example:
A breakout of price higher during strong bullish momentum in underlying assets is one market condition where intraday scalping can be done.
A strong bullish momentum in the underlying asset can be identified using the RSI. A breakout could be confirmed once the price moves above the VWAP and the 9EMA. This indicates a potential uptrend. A long entry could be during a pullback to the VWAP while the RSI remains above 50. In this case, you could consider buying at-the-money (ATM) call options to take advantage of the bullish movement.
Exits can be based on a specific percentage rise in the option's premium as your profit target, or you could set a stop-loss just below the VWAP to limit potential losses. An increase in volume when the price drops below the VWAP could also signal that it's time to exit.
Since scalping involves entering and exiting positions quickly, it’s important to have tight stop-loss orders in place to minimise losses. This requires continuous monitoring of market movements and being ready to act quickly to capture small price moves.
2. Buying Options Intraday on Volatility Breakouts
Since changes in volatility directly impact option premiums, a sudden rise in volatility can cause a significant increase in the option’s premium.
Buying ATM options on volatility breakouts involves identifying price movements in the underlying asset that signal a breakout. This is generally identified in underlying assets using technical indicators like Bollinger Bands, Average True Range (ATR), or VWAP.
Traders usually prefer short-dated options with a high delta, as these respond quickly to price changes. To minimise the impact of time decay (theta), they select expirations that give them enough time for the move to play out without holding on too long.
Setting clear profit targets is essential in this strategy, as traders aim to exit before any retracements or reversals can eat into their profits. The profit targets can be a specific percentage increase in the premium of options held. This approach focuses on capturing fast, significant price moves while managing the risk of losing too much to time decay.
To learn more about Volatility Breakouts, head over to the free section in our premium course on Volatility Trading Strategies.
3. Trading Mean Reversion of Volatility
One important characteristic of implied volatility is mean reversion. Unlike intraday equity trading, where traders rely on the mean reversion property of the asset's price, intraday options traders focus on the mean reversion of volatility and take positions to capture it. Metrics like Implied Volatility Rank (IV rank) help identify high volatility phases, allowing traders to sell strategies like straddles, strangles, or credit spreads to profit when volatility cools down.
However, there are two risks to consider:
a. Volatility Clusters: Even during high-volatility phases, volatility can persist for longer than expected before reverting. In such cases, selling options strategies might increase the risk, as the market could stay volatile longer than anticipated.
b. Underlying Price Impact: In addition to volatility, the underlying asset’s price also affects the option’s premium. A sudden rise in the price of the underlying asset during a high-volatility period can increase the option's premium, adding risk to short positions.
To manage these risks, strict risk controls are necessary, such as setting stop-loss levels or trading with smaller positions. The goal is to take advantage of the tendency for volatility to revert to the mean, providing opportunities to sell options at a higher premium while minimising the risk of large losses.
If you are considering intraday options trading, we recommend you to learn options backtesting.
4. Intraday Gamma Scalping
Gamma scalping for intraday options traders is a strategy that involves dynamically hedging delta-neutral positions to profit from frequent price fluctuations. The goal is to capture small, quick gains from market movements while maintaining a neutral exposure to the underlying asset. This strategy is particularly effective in high-volatility environments, where the underlying asset's price moves rapidly, creating frequent opportunities for profits.
In gamma scalping, traders adjust their hedge levels based on market momentum. As the price of the underlying asset moves, they buy or sell the asset to maintain a delta-neutral position. This means that the position's overall sensitivity to price changes of the underlying asset is neutralised, reducing the risk of large directional moves (hence, the name, delta-neutral).
By rebalancing the position frequently, traders can capture small gains from price fluctuations without trading for a specific directional move.
To better understand this, let's break down an example:
Example:
Let’s say you're trading a call option on Stock XYZ, which is priced at $100. The delta of your option is 0.50, meaning that for every $1 move in the stock, your option’s price will change by $0.50. If the stock moves up by $1, the delta of the option might adjust to 0.55 due to the change in the underlying price, meaning the option has become more sensitive to price moves.
To maintain a delta-neutral position, you would need to sell a small portion of the underlying asset to offset this increase in delta (an increase of 0.05). If the stock then moves back down by $1, your delta would adjust again, and you would buy back the shares you sold to return to a neutral delta position.
By constantly adjusting the position as the stock moves up and down, you are capturing small gains from these frequent price fluctuations. In a volatile market, these adjustments can lead to quick profits, as the price of the underlying asset may fluctuate many times within the day.
However, gamma scalping requires quick reactions and a solid understanding of how gamma (the rate of change in delta) affects the option's position. When volatility increases, gamma increases as well, making it necessary for traders to adjust their positions more frequently. This dynamic adjustment helps to capitalise on short-term price changes, minimizing exposure to large directional moves and offering opportunities for consistent, smaller profits.
You’ve probably noticed that executing gamma scalping manually can be tricky. It requires constantly monitoring gamma, the underlying price, and understanding how these factors impact open positions and their delta. Because of this complexity, it’s usually done algorithmically, with automated systems handling the entry and exit conditions.
You can read more on our blog on Gamma Scalping, It covers how to use Gamma Scalping in trading, strategies, formulas and examples
If you want to implement Gamma Scalping on Nifty, download the Jupyter notebook for free from our premium course on Options Trading Strategies Advanced. You would need to sign up to free preview the explanatory video and download the Python code.
Risk Management for Intraday Options Trading
Since options trading carries inherent risks, it's crucial to implement a strong risk management framework. This can be done by effectively managing trade positions, setting tight stop-losses, using hedging strategies, and keeping an eye on risks from theta decay.
Position Sizing: Only allocate a small portion of your capital to each trade to avoid overexposure. You can read more on our blog at Position Sizing, this covers, importance, trading biases, techniques and much more.
Stop-Loss Strategies: Set predefined exit levels based on either a specific dollar amount or percentage move in premium to protect against large losses.
Check out this blog on The Hidden Truths About Stop Loss In Trading by Dr Euan Sinclair. A great read!
Hedging Techniques: Utilise strategies like delta hedging or spreads to limit directional risk and reduce exposure.
Avoiding Time Decay Traps: Avoid holding long option positions too close to expiration unless absolutely necessary, as time decay can erode their value quickly.
Managing Execution Risks: Use limit orders when possible to minimise slippage and ensure you're entering or exiting at your preferred price.
Execution and Trade Management
Effective execution and trade management play a crucial role in enhancing your overall trading performance. Fast order execution is key, so using a reliable trading platform that allows for quick entries and exits can make a big difference in capturing profitable opportunities.
When placing orders, you’ll need to decide between limit and market orders.
- Market orders guarantee execution, but they can lead to slippage, meaning you might not get the price you were expecting.
- Limit orders, on the other hand, allow you to control your entry price, but they carry the risk of not getting filled if the market doesn’t reach your specified price.
Another important consideration is tracking the bid-ask spread. Trading illiquid options with wide spreads can eat into your profits, so it’s best to avoid those.
Finally, managing emotions is a key part of trade management. It’s easy to get caught up in the heat of the moment, especially after a loss, but it’s essential to stick to your predefined strategy and avoid making impulsive decisions based on emotion.
By focusing on these aspects, such as quick execution, choosing the right order type, staying mindful of liquidity, and managing emotions, you can trade options intraday effectively.
Common Pitfalls and How to Avoid Them
In options trading, avoiding common pitfalls is crucial. Here are some key mistakes traders make and tips on how to avoid them:
Overleveraging:
Excessive position sizing can quickly lead to large losses and rapid account depletion. While options provide leverage, using too much of it increases risk significantly. To avoid overleveraging, stick to a risk management plan where only a small percentage of your capital is allocated to each trade, and use position sizing techniques to limit exposure.
Ignoring Liquidity:
Trading options with low open interest and volume can result in poor fills and high slippage, meaning you might not get the expected price for your trades. To avoid this, always check the bid-ask spread and ensure the option has enough liquidity for quick entry and exit. Opt for options with higher volume and open interest to improve the likelihood of filling your orders at favourable prices.
Holding Trades Too Long:
Holding onto options for too long can lead to the erosion of premiums due to time decay (theta), especially if the trade doesn’t move favourably. It’s important to set realistic exit points based on time and price targets. Consider using stop-loss orders or profit-taking strategies to exit trades before time decay significantly impacts your positions.
Misjudging Volatility:
Volatility plays a huge role in options pricing, and failing to account for changes in implied volatility (IV) can lead to unexpected losses. For example, if you’re buying options and IV drops, the premiums could decrease even if the underlying asset moves in your favour. To avoid this, stay mindful of IV and consider the impact of volatility changes when choosing strike prices and expiration dates. Using tools like IV rank can help you assess whether volatility is high or low before placing trades.
By being aware of these common pitfalls and incorporating risk management strategies, you can reduce potential losses.
Frequently Asked Questions
1. Can beginners trade intraday options comfortably?
Intraday options trading requires a strong understanding of options Greeks, market trends, and risk management. Beginners should first practice with paper trading or trade small positions before committing significant capital.
2. How do I choose the right strike price for intraday options trading?
For intraday trading, traders typically choose at-the-money (ATM) or slightly in-the-money (ITM) options because they offer the best liquidity and price movement responsiveness. Out-of-the-money (OTM) options may be cheaper, but they tend to have a lower delta, meaning they might not move much even if the stock price changes.
3. Can I hold my intraday options trade overnight?
Holding options overnight exposes you to overnight risk, including changes in implied volatility, market gaps, and theta decay. Most intraday traders exit their positions before the market closes to avoid these risks.
4. Should I focus on buying or selling options for intraday trading?
Buying options offer limited loss but high risk from time decay and volatility shifts. Selling options can be profitable in high volatility but exposes you to unlimited risk if the market moves against you, requiring strict risk management.
5. How do I avoid getting trapped in a volatility spike when selling options?
Monitor indicators like IV Rank and historical IV levels to assess volatility. Avoid selling options before major events, as these can lead to sustained volatility, increasing the risk of a spike.
6. Is there an ideal time of day for intraday options trading?
The first and last hours of the market session tend to offer higher liquidity and more price movement, making them ideal for intraday options trading. Additionally, major events like earnings reports or economic announcements can cause significant volatility shifts, creating more opportunities during those times.
7. Should I hedge my options positions intraday?
Yes, hedging with the underlying asset or using delta-neutral strategies helps protect against unexpected price movements and limits potential losses. Check out an example of trading delta neutral using volatility skew.
Conclusion
Intraday options trading is a high-reward, high-risk strategy that demands a deep understanding of volatility, order execution, and risk management. By choosing the right strategies, managing risk carefully, and avoiding common pitfalls, traders can improve their efficiency. It's crucial to backtest strategies and refine them before applying real capital to ensure consistent results in live markets.
Continue Learning
It's time to explore more advanced options trading concepts:
- Learn how implied volatility affects option pricing and how to calculate it with Python in our blog on Implied Volatility: From Basics to Python Calculations.
- If you're interested in hedging and dynamic risk management, dive into Gamma Scalping this will cover How to Use in Trading, Strategies, Formulas, and examples.
- Additionally, gain insights into practical options strategies with 15 Most Popular Strategies on Options Trading.
- For a comprehensive, hands-on program that covers the full spectrum of algorithmic trading and machine learning, look no further than the Executive Programme in Algorithmic Trading (EPAT). Designed for both aspiring and experienced traders, EPAT equips you with cutting-edge skills and insights to excel in today’s fast-paced financial markets.
The Options Modules in EPAT are curated by some of the most respected professionals in the field. Rajib, founder of iRage—among Asia’s top HFT firms (3rd largest in MCX options, 2020–21; top 4 in BSE equity derivatives)—shares his real-world expertise across various asset classes. Euan Sinclair, with over 27 years of experience in quantitative options and volatility trading, brings insights from his highly regarded industry books. Varun P, the author of this blog, specializes in translating theoretical knowledge into practical trading strategies. EPAT delivers hands-on learning from these experts, ensuring a comprehensive and applied education in options trading.
The strategies and parameters discussed in this blog are intended for informational and educational purposes only. They are not intended as financial advice or a recommendation to buy or sell any securities. Trading options involve substantial risk and may not be suitable for every investor. The examples provided are meant to illustrate common strategies and concepts and should not be considered as specific investment advice. Always conduct thorough research and consider consulting with a qualified financial advisor before making any trading decisions. The use of any strategy or parameter in real trading should be based on your individual risk tolerance and financial situation.
