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I want to day trade SPY options by buying at the open and closing the position later in the day, but I need to know approximately how far into the money the contract will have to be for me to break even on the two trades. In other words, how much it will cost to buy at the open and sell back later in the day. Presumably this depends on what broker I would be using and how many contracts I'm trading, but any specific examples and/or broker recommendations would be appreciated.

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  • $\begingroup$ Have you looked at bid ask spreads for options in the real world? They are pretty big and I doubt a day trading strategy would survive such large transactions costs. $\endgroup$ – Alex C Feb 24 '18 at 13:00
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Yes, your problem is that you have your primary transaction costs for making the trade then you have to pay your taxes to the market makers through the bid-ask spread. I highly doubt your strategy will work. Another thing is that on the open and the close for options, typically market makers will not post quotes (or the spread will increase) because volatility increases at these times. As such the bid-ask spread can widen significantly thus hurting your trading strategy even more. However there’s a mathematical way to test if it’s feasible.

One thing you could do is get a hold of the historical bid-ask on options then calculate the daily drift of the S&P500. If the drift is bigger than the average bid-ask spread then your strategy may be feasible. I’ll tell you right now it’s probably not - a weekly or monthly strategy however may be viable.

A better strategy you could try would be purchasing call options on companies that have recently crashed in price. Obviously you’ll have to do research on the company to see if the crash is warranted. This strategy was employed by Cornwall Capital (one of the funds from the movie the Big Short) which actively sought underpriced options. One of their biggest successes was buying calls on Capital One after it crashed. Anyways do some research into that strategy and don’t use Black-Scholes as a proxy for valuing options if you’re going to try it.

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