Most swing traders use long stock for expected upswings; and either short stock for downswings or just stay out because shorting is high-risk. Two things are problematical with this idea. First, the risk should not be ignored; and second, you miss half of the swing opportunities by avoiding going short.
There is a solution, and it enables you to trade with control of 100-share lots for much less cost than 100 shares. It also reduces market risk. Using options to swing trade is a logical answer, assuming you have the knowledge of trading rules and risks associated with options trading. Every option controls 100 shares of stock, and these are many ways to swing trade -- and if you don't like going short, you never have to with long options.
Here are five ways to swing trade with options:
1. Long positions only. Buy long calls at the bottom and sell them at the top. Then buy long puts at the top and sell them at the bottom.
2. Use calls only. Buy calls at the bottom and sell at the top, and then open a short call and close it at the bottom.
3. Use puts only. Same idea, but in reverse. Buy long puts at the top of the swing and sell at the bottom. Then sell short at the bottom and close at the top.
4. Use both calls and put. You can double up the swing by opening both bullish and bearish positions. This consists of a long call and short put at the bottom, and a long put and short call at the top. These positions, also called "synthetic stock" if using the same strike, double your potential income (but also exposes you to more risk). The advantage is that with both a long and a short, you have little or no net cost.
5. Short options only. Finally, use only short positions. The big advantage here is that you always receive money and never pay to open a position. The disadvantage is that this is a high-risk approach. In the short-only method, you open a short call at the top of the swing and then close at the bottom; and you open a short put at the bottom and close it at the top.
Any time you have an open short position, collateral requirements apply. To determine the collateral rules for any options position, check the free download from CBOE at CBOE Margin Manual.
Swing trading with options improves leverage but potentially also increases some forms of risk in exchange for reducing others. The whole range of market risk should be evaluated as part of a swing trading program; and once risks are evaluated, comparisons between the use of stock and options is a smart step.
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