Day Trade or Swing Trade?

Lots of traders like to day trade. Some like to swing trade. Most don’t know how to decide between the two. So here’s a thought; how about I let the price of the underlying instrument determine that for me? How’s that work? Read on and you’ll find out!

On that risk profile (above) of day 1 of the trade, a 1% move higher in SPX price would be approximately a $116 profit which would be a 42% return on the $275 of risk. Not bad for a day trade! If SPX instead moved 1% lower in price then I’d exit the position with a $96 loss. It’s actually more likely a sell stop would’ve triggered prior to a 1% drop in SPX because my stops on most trades are much less than a 1% move in the wrong direction! However, assuming price did drop by 1% that translates to an unsuccessful day trade but the loss was contained. Whatever bullish chart setup that caused me to initiate this trade failed and the trade is over. Tomorrow is another day and another opportunity! If price instead moved higher and the bullish setup is still intact at the end of the day I could exit the day trade for a nice return or I could hold it overnight and turn it into a swing trade. So price decided to give me an opportunity for a swing trade.

In the risk profile (above) showing the profit/loss as of the end of the first week of the trade the profit if SPX price is 2% higher is an 83% return on initial risk. If price is just 1% higher than the day 1 price the profit is gradually decreasing because an out of the money (OTM) Butterfly (or any other OTM spread) is short (negative) Theta. SPX needs to continue with it’s upward momentum in order for me to stay with this trade. So let me make this exceedingly simple! Imagine a rising 8-SMA on the SPX hourly chart. I’ll stay in this Butterfly position as long as the moving average continues to maintain a positive slope (below). If price breaks down below the bands and the slope rolls over I’ll exit the position and take my profit or loss and move on to the next trade.

In the risk profile (below) I’ve advanced to the end of the first week of June. Once again, SPX price must be maintaining it’s upward momentum for me to remain in the trade. If price is advancing then this is an easy position to hold on to!

Finally, the risk profile (below) reflects expiration day. This is when the payoff to this type of position can be huge. A 5% move higher in SPX by expiration day would have a return of over 1,000%. I don’t have to hit on too many of these returns to make for a profitable year in trading. Compare that to day trade scalping where some days are winners and some days are losers. Now, since my whole philosophy of trading is built around the concept of Delta Hedging (DH) positions I’d be remiss if I didn’t point out that twist to this trade. Let’s assume that SPX rose in price by 3% by the end of the first week of June. At that point I’d likely be able to reduce the cost of the Butterfly by narrowing the spread. How do I do that?

If SPX rose in price by 3% by the end of the first week of June I could likely sell a Condor for a $2.50 credit. See the risk profile below. That could almost eliminate the entire cost of the Butterfly spread and could take the maximum potential profit to 159 times the net-down risk of $25. Risk 1 to make up to 159? I’m ok with that! And that all started out from a simple day trade?

So that’s how I let the price action determine whether a trade is a day trade or a swing trade. In order to have that possibility when I initiate a new trade I must give it enough duration to allow price to move higher at it’s own pace. The shorter the duration of the trade the greater the Delta risk.

Questions or comments? You can find me on the @VegaOptions twitter feed.