Market Overview

Swing Trading: Long and Short, Calls or Puts

This article is the third of six on the topic of using options to swing trade. The topic this week is the most basic of swing trading methods, the use of long options only.

Swing trading with options in place of shares adds great flexibility, provides leverage and reduces risk. For example, instead of selling short at the top of the swing, using long puts helps expand a long-based swing trading strategy. But you can do much more.

The long-and-short approach can involve either calls or puts (or a combination of both). In the call-based strategy, you buy calls at the bottom of the swing, and close them at the top; you then sell calls for bearish plays and buy to close at the end of the downswing. But that uncovered short call adds much greater risks that using a long put in the same place.

One solution is to employ the call-based strategy when you also own stock as part of the permanent portfolio. This makes swing trading an expansion of the covered call strategy, in which you also use long calls and play both sides of the swing.

Using only puts may be more digestible for many traders, who acknowledge that uncovered puts are far less risky than uncovered calls. In this strategy, you sell uncovered puts at the bottom of the swing and then buy to open at the top. At the same time, you then open long puts to wait out the bearish swing, and close at the bottom.

To really expand these ideas creatively, imagine doubling up on both sides. At the bottom of the swing, you open a long call and a short put, creating a synthetic long stock position; and at the top of the swing, you close out those positions and replace them with a long put and a short call. This is a synthetic short stock position.

The big advantage to synthetics is that the net cost is going to be very small, perhaps even setting up a credit. The premium income from the short position offsets the cost of the long position, and this works on both sides of the swing.

Given these possible variations, using options for swing trading offers great potential for managing risks while creating profits. One additional note: Swing trading with options is one of the few strategies in which contracts expiring in less than one month are an advantage, whether long or short.

Why? Swing traders expect their positions to remain open only three to five sessions, so short-term options work best. Also, at-the-money or slightly in-the-money options have very little time value remaining when that close to expiration. As a result, movement of the underlying in the desired direction is most likely to be accompanied by close tracking in the options as well.

Whether you use options or other strategies, you can expand your trading with numerous low-risk ideas and make the whole thing quick and easy. Check the many ideas for profitable trades at this link if you want to expand into options and beyond while keeping risks as low as possible.

Please look for the remaining three articles in this series, to follow over coming weeks:

  • short options only
  • variable weighting on one side of the swing
  • spotting the swing reversal

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