Trading is an uncertain process. Traders constantly try to predict how the prices of stocks or assets will evolve. Many times they profit from their prediction, but there are also times when they don’t.
The trading market has evolved so much that you can use hundreds of trading strategies and choices. Many of them are beginner-oriented, while others are for advanced traders only.
Options trading is a trading technique that is widely used today, and it is often combined with swing trading strategies and systems. But how do these strategies work, and what are some of the best options for swing trading that you can invest in?
Let’s find out.
Defining the Terms
What are options in trading?
Options are the economic term of trading contracts.
They give the buyer the right to buy or sell an underlying asset at a particular price. The buying action is, in fact, the purchase of “call” options, while the selling action is the sale of “put” options.
Options derive their value from the underlying asset, and an options contract is expressed in 100 shares. Purchasing one option is equivalent to purchasing 100 shares of an underlying stock or asset.
But what is the purpose of using options when you can purchase stocks or assets directly?
Well, buying or selling options give you the advantage of minimizing your losses. A strategy that allows you to buy calls and sell puts simultaneously provides a safe entry and exit from a trade.
What is swing trading?
The name “swing trading” derives from the extreme upward or downward price swinging of the assets or stocks being traded.
Swing is a process through which traders seek to profit by utilizing abrupt and extreme price swings. This type of trading is focused on short-term gains, which may last for several days or weeks at maximum.
Some of the most important factors to consider when entering swing trading are:
- What is the price that will result in a profit
- What is the price that will cut result in a minimal loss
- In which direction will the price move, and when to enter the trade
Swing trading is also the middle-ground between day trading and long-term trading because it embeds characteristics of both trade models, but it is an entirely different trading system.
Best Stock Options for Swing Trading
Apple (AAPL)
Apple is a world-renowned tech giant and one of the market's most stable multi-billion dollar companies. Its primary focus is consumer electronics, and it receives most of its profits from their most famous product - the iPhone.
In addition, Apple offers its customers various software-related services like Apple Music, iCloud, Apple TV+, Apple Pay, etc. The company does an excellent job of marketing and unifying these hardware and software solutions under one roof.
This makes Apple a trillion-dollar company since 2021 and is one of the reasons why swing traders are so interested in buying and selling options contracts on Apple stocks.
Microsoft (MSFT)
Microsoft is an even bigger tech giant than Apple. But unlike Apple, Microsoft’s primary focus is software-oriented solutions and licenses. The company’s most famous and renowned products are the Windows operating system and the Office productivity suite.
Microsoft is also focused on the gaming industry, offering the Xbox console as the main competitor of Sony’s PlayStation.
Microsoft suffered a positive impact since the COVID-19 pandemic, and cloud-based services' use started to rise. This resulted in the company earning close to 170 billion in revenue in 2021, which is why swing traders use its stocks to make quick profits.
Facebook (FB)
Meta, the company behind Facebook, sets itself apart by offering software oriented toward connecting and serving people’s social needs.
Since its founding in 2004, the company has experienced a steady rise in users and revenue. Today, the platform has nearly three billion users worldwide and is worth over 450 billion dollars.
Since the onset of the 2020 pandemic, people have become even more interested in using social media platforms due to the isolation periods. This, paired with using Facebook ads in marketing, made the company’s stock experience a significant price rise.
Market projections state that Meta’s stock value will continue to experience growth and stability. That is why it’s an excellent choice to purchase options for swing trading with this stock.
Amazon (AMZN)
When someone asks you what the largest online retail company in the world is, you immediately think of Amazon. The company has become one of the largest in capitalization and sales, making its stock a valuable interest point for swing traders.
Amazon’s stock is one of the best in terms of growth worldwide. Since 2010, the value of this company’s stock has increased by more than 2500%, especially during the COVID-19 pandemic.
The steady incline of Amazon’s stock is one of the reasons why investors and traders take such a high interest.
Alphabet (GOOGL)
Investing in Alphabet (Google’s parent company) will always be a smart choice. Google is the world's most widely used internet search engine, and over one billion people (at the time of writing) use the company’s products and services.
Alphabet’s stock value has been steadily increasing over the years, even though in 2023, there has been a slight decline due to the company’s ads business. On the other hand, the subscription and cloud businesses experienced constant growth. This results in the value of the stock to keep rising in spite of the adverse effects.
Overall, digital advertising and internet search engines are not going anywhere, and Google will continue dominating this part of the market for a long time.
Advanced Micro Devices (AMD)
Advanced Micro Devices is one of the world’s two largest microprocessor manufacturers. It's a direct competitor to Intel.
Until 2014, AMD struggled to keep a steady position on the stock market, as it experienced improper leadership and poor performance processors. Since Lisa Su, AMD’s current CEO, took the job in 2014, the company has drastically increased its market share and profitability.
The introduction of the Ryzen processor series, and later the Threadripper model, made AMD a worthy competitor of Intel once again.
Because of the turnaround strategy used by Lisa Su, and the enormous increase in value of the company, it has never been a better time to invest in AMD stocks than it is today.
Starbucks Corporation (SBUX)
Starbucks is one of America’s great success stories that has slowly expanded and developed for decades. From the 1990s until today, the company has had an increase in stock value of up to 17,000
%. Most of this increase has happened since early 2009.
The company may have a less impressive performance than the previous examples mentioned, but the massive coffee chain will remain active for many more decades.
This is why many traders believe Starbucks stock is an excellent choice for long-term trading, making it suitable for swing trading opportunities.
Caterpillar (CAT)
Caterpillar is one of the world’s largest construction equipment manufacturers. It was founded in 1925, and in 2018 it was ranked number 65 on the Fortune 500 list.
The company has had a significant incline in revenue and stock price from the beginning of the second half of 2005. It had a 13.3% yearly growth in the past five years, and it is expected that in the years that follow, growth will continue with a similar trend.
This means that the fundamental investment outlook for the heavy machinery industry, including the Caterpillar company, is overly optimistic.
Since analysts expect the earnings of Caterpillar to reach up to $16,000 per share, it is now a good time to invest and purchase swing trading options on its stocks.
Salesforce (CRM)
Salesforce is a software company that offers cloud-based customer relationship management software focused on customer service, sales, e-commerce, marketing, analytics, etc.
The Salesforce stock has had a steady incline since mid-2010 but suffered a mild decline in mid-2022. Nevertheless, the stock has been improving toward the end of the year, with an annual growth of about +9%.
Since a stock recovery phase has already begun for Salesforce, it would be wise to swing trade with this stock. Many long-term traders also believe that now is the time to invest in Salesforce stocks since the importance of cloud-based software has yet to gain momentum of importance.
How to Implement an Options Swing Trading Strategy?
There are several things you need to consider before swing trading with options.
First, you must choose the right stock or security. Examine which stock and stock market you know best by doing thorough research. If you’re good at technology, seek and investigate big and stable tech companies and look at the market and price swings of the preferred company’s stock.
Second, you must decide whether to purchase a call or a put option on the chosen stock. If you think the stock price will rise in the future, you must buy a call option. If the stock price is going to fall, then buying a put option is smarter.
Third, you must determine at what price you want to buy or sell the options. This is the so-called “strike price.” There are three strike price choices available:
- In-the-money strike price (one that is better than the current stock price)
- At-the-money strike price (one that is the same as the current stock price)
- Out-of-the-money strike price (one that is worse than the current stock price)
Fourth, you must determine when the option contracts you purchase will expire, purchase them and manage your position. Once you buy the options, you have to be patient and monitor the charts to make a profit. Most often, the risk of loss with swing trading is the premium price you pay for the options contracts.
Conclusion
Swing trading is a safe and low-risk approach to trading. It is a skill that both beginners and advanced traders can use effectively. Paired with stock options, swing trading can provide an exciting and dynamic way to follow price trends and earn a profit.
A great platform to try your swing trading skills is FoolProof Options. They offer intuitive insights into price movements, weekly alerts, and much more to keep you updated on your options investments.
What do you think are some of the best options for swing trading, and why? Feel free to share your opinion and comment below.