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How to Trade DITM Options

 
     
  On this page you will learn a step by step method for how to trade DITM options.
 

 
     
 
 
     
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Trading DITM options is an excellent method of exploiting the DELTA of an option, whereby you can take full advantage of the price movement of a stock, get double the Return on Investment, or effectively buy stocks for half the price. It is a perfect method for Swing Traders - it reduces your risk by half, reduces your downside, and doubles your profit potential. Do you need to know how to trade DITM options? These are the exact steps that you take for a successful trade:

First: Pick your Stock
You can either use one of your favourite stocks, or you can run a scan for "ready-to-roll" stocks that are perfect for DITM options. I have set up specific scans to find these stocks using Stockfetcher. Copy and paste the scans into the free Stockfetcher programme, and you will get 100 stocks to sift through.

 

Second: Technical Analysis
The scans mentioned above will already have done most of this for you, but just to remind you, here are the specific steps you need:

  1. Trend analysis. Establish the trend of both the Market and your stock. Don't try and buy calls in a falling market! See How.
  2. Swing Analysis. Find stocks that have dipped to the bottom of the trend band i.e. in the Trader's Action Zone (TAZ). These are stocks that are trading between the 10ma and 30ema. See How.
  3. Swing Confirmation. Confirm the swing with Candlestick Patterns (See How). Check the RSI and VIX to make sure that a swing imminent.

Third: Choose your Option and buy it!

  • Pull up an options table which shows the DELTA of the option. Your broker software should have this feature. Either that or use the Options Calculator, for which you will need to know the volatility of the options. Pick an option that has a DELTA that is at or close to 100.
  • Option Value. Don't buy overvalued options! You will watch your trade value bleed away. You will need to use software for this - I strongly recommend Volcone Analyser Pro for this (the only bit of this method that is not free!).

Fourth: Set your Stop Loss and Profit Target IMMEDIATELY!
Remember, this is not gambling! Your swing analysis, and confirmed by a look at support and resistance levels, will help you do this.

  • Stop Loss - If you normally set a stop loss of 4% for your stock, then set a stop loss of about 8-10% of the stock movement for your option.
  • Profit Target - set a profit target based on the swing of the underlying stock. Either simply add the dollar value of your anticipated profit to the option price, or use the Option Calculator to work it out. Or use a trailing stop - whatever is your favourite method. Sell the option as soon as you hit your profit target - don't wait until expiration, other wise you will lose 100% of your investment! Plan to exit the trade within 10 days or so - if it hasn't moved by then, the swing analysis dynamics would have changed, and your trade is at risk.

Where to Next?

For a real trade example and a slightly different approach, look at my page about a DITM strategy with ETFs

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