Scalp Trading

Scalping, day trading, call it what you will. We call it engagement. Scalp trading is buying and selling the same stock or future, usually over a few hours. Most often, we use futures contracts when scalping mainly because of their liquidity.

Sometimes scalping is the only game in town and saves us from Sudden Onset Narcolepsy or SON. Other times, scalps are what we do against a core position. Scalping vs. the core is a mix of short-term vs long-term. How do we decide which one it is and how do we decide how long to stay in a scalp? In a word: volatility.

If you’ve been playing at home, you know volatility can be used to approximate a one standard deviation move in an underlying. Lower volatility equates to smaller ranges. Higher volatility means wider trading ranges. For the sake of argument, let’s assume we’re trading S&P futures (/ES). One tick in /ES is equal to $12.50 per contract. There are four ticks to a single /ES point, which means a one point move in /ES is equal to $50.

When market volatility is low and a one standard deviation move is only say, twelve points, which was fairly common over the past couple years, we might look to scalp around four points (0.25 standard deviation move) or $200 per contract.  Think smaller, quick profits.  

In a market like the one we’re in now, a one standard deviation move is around 30 points. Because the expected range is wider, so too are the number of points we’re after. If we remain consistent trying to capture that 0.25 standard deviation move, we might look for eight points.

This is why during times of higher volatility, scalp trading can offer interesting opportunities and we might be more aggressive in pursuing them. Why? That same higher volatility might be hurting our longer-term core positions. The scalps, then, can act as a sort-of hedge against the core position.

These are just some general guidelines we here at tastytrade use. At the end of the day, scalping is an engagement tool but not our core portfolio. But when you see /ES moving up and down 20, 30 or 40 points in a day, you may want to think about how scalping could take advantage of that volatility.

If you want to see more on scalping, go to the Scalping series on the tastytrade network here. And if you have any questions/comments/thoughts, leave a comment below or reach out to 

Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:

Scalping Recap - December 15, 2015

Confirm and Send - January 11th, 2016