At Top Gun Options we use some options strategies that produce profits in minutes and others that generate profits over months or even years. The question one might ask is, what is the best time frame for options trading? To answer this question you need to look at profit potential and risk as we always do. Then the question is how long you want to tie up your trading capital. Perhaps the first question to ask is how effectively you can predict the market for longer terms going forward. For an “outside” opinion on this subject we looked at what the Nasdaq says on the subject.
Nasdaq on Options Trading Time Frames
Nasdaq published an article from Zacks. The author leads off by noting that when he was new to options trading the company that he worked for had a rule. You could trade options whose term was no more than the square root of the term of the options contract. The first point of this rule was that shorter term options are more liquid which gave the trader the potential ability to trade themselves out of a jam if necessary. The second was that the “Greeks” are time sensitive. Gamma increases as expiration nears and Vega becomes very small. For much longer option contract terms these are reversed. What this means for the average options trader is that options contracts with shorter time frames are more likely to produce profitable trades because they reduce factors beyond your control like huge changes in implied volatility. They say that the “sweet spot” for option trading time frames is between 30 and 90 days.
Options Trading Strategies and Best Time Frames
How you choose to trade will determine your contract time frames to a great degree. If you prefer scalping for repeated short term profits you will be in and out of trades in minutes and not tying up your capital for a year. If you prefer a long synthetic stock call approach you will likely be in a contract for more than a year. Swing traders stay in contracts for days, weeks or even months and day traders get out of all of their contracts before the session ends. Traders whose skills include accurate analysis of fundamentals will typically swing trade because that is where their profits lie. Traders who are more skilled in reading market sentiment and technical indicators will likely stick with day trading or short term swing trading because that is where they earn their profits.
Cost to Benefit Analysis in Determining the Best Options Trading Time Frames
No matter which markets you trade or which strategies and time frames you employ you will be smart to periodically review your results. When you do this for time frames look at time spent, amount of capital tied up for trades and for how long, and profit or loss. Many times, the answers you are looking for will be staring you in the face if you simply take the time to review your trades. The sweet spot for an individual trader will likely depend on the strategies he or she uses which will, in turn, dictate time frames for trades. When you drill down into your results you may realize that one or two strategies that you routinely use do the best at hedging risk and providing profits while others turn out to have been a waste of time. Here is where many traders come to realize that option trading profits come from well-chosen and well executed trades used when conditions are right and not from frantically entering poorly chosen and executed trades that all-too-often lead to losses that wipe out the rest of their gains!
