best option strategy for my quant stock trading system?

(From my perspective) I would think your goal would be to cut down on that "losing 8%". I would look to improve the risk management. One idea is to use a debit spread. If you're right on your trade idea then you make money.... but

WHAT IF YOU'RE WRONG...

This gives you an opportunity to "adjust" your trade into a skip strike butterfly or a ratio butterfly. The end result is you "take in a credit" to pay for your loses on the original debit spread. (so in theory when you're wrong, your losses are 0% not 8%- but don't expect it to go perfect) Plus this trade takes time to learn....

Of course, there are trade offs. Like all options trading strategies. However, it is my personal "trading philosophy" that controlling losses and risk are two main keys to trading success.

This page will show you how in more detail:
http://www.strategic-options-trading.com/debit-spread.html

good luck my friend...
 
i took a look today on the bid/ask differences of various sp500 stocks. most are ok but some have spreads of over 5%. it is not senseful to trade them if the option must move at least 5% (+ commission) to breakeven, right?

will it be always like that or is a stock that moves down by more than 8% two days in a row (this is one of my buy rules) and is listed in the s&p 500, will not provide a tight spread?

and, since i have no expierence with options; what is considered to be a tight spread in us stock options? when the bis ask difference is how much percent?

please help!
 
Quote from artem65:

i took a look today on the bid/ask differences of various sp500 stocks. most are ok but some have spreads of over 5%. it is not senseful to trade them if the option must move at least 5% (+ commission) to breakeven, right?

will it be always like that or is a stock that moves down by more than 8% two days in a row (this is one of my buy rules) and is listed in the s&p 500, will not provide a tight spread?

and, since i have no expierence with options; what is considered to be a tight spread in us stock options? when the bis ask difference is how much percent?

please help!
More...

i usually only trade options if the spread is less than 10% but there is still a huge universe of stocks that meet this criteria. trading wide spreads isn't worth it IMHO b/c you give up too much getting in and out. i know, i know - just work the spread. well that doesn't work as often as you'd think and you end up paying near the offer and selling near the bid. say you make a 40% return on a trade but give up 10% on the transaction (ignoring commission)? you've just given up 25% of your profit.

not sure what you mean by a stock moving down two days in a row?

for your third question, see my previous answer. there are a lot of stocks w/ penny spreads. even ones w/ nickel spreads are really tight if the UL (stock) is priced above 100.
 
(a) If you are trading untied in retail size, I hope you guys don't just trade the screen bids and offers. In general, you are better served by showing a limit order around mid and waiting for the stock to move enough to make some MM hit or lift you against delta. You will almost certainly do better (even on delta-adjusted basis) then if you just take whatever NBBO is there

(b) A 5-10 percent move of option premium translates to a fairly small amount of movement in the stock itself. A simple calculation will prove it to you:
-- imagine that you have a low volatility stock, e.g. something that moves about 1% a day - it's annualized volatility would be about 16%.
-- assuming that implied trades at a 4% premium over realized, a 1 month ATM call will cost about 0.4*0.16*sqrt(1/12) = 2.3%
-- the delta of an ATM option is about 0.5 (positive or negative) which that means that for a 1% move in underlying (a regular daily move), you option premium will change by 0.5%, which is about 22% of the option premium
 
i cant follow some of your tips, especially when greeks are included. ;-)

what do you guys think about trading Direct market access CFDs? they have leverage of 10 and follow the stock 1:1.

i think they have also better spreads then some options, right?
 
Quote from artem65:

i took a look today on the bid/ask differences of various sp500 stocks. most are ok but some have spreads of over 5%. it is not senseful to trade them if the option must move at least 5% (+ commission) to breakeven, right?

will it be always like that or is a stock that moves down by more than 8% two days in a row (this is one of my buy rules) and is listed in the s&p 500, will not provide a tight spread?

and, since i have no expierence with options; what is considered to be a tight spread in us stock options? when the bis ask difference is how much percent?

please help!
More...

If you want tight option bid/ask spreads of .01-.02 (similar to the stocks spreads):
1st: you are going to have to first find the stocks that have options with those tight spreads,
2nd: then apply your stock trading methodology to that limited universe of stocks that have options with that tight spread.

I know, its a bitch! Why do think I only trade the SPY etf?

There are some popular large cap stocks and etf's with those tight spreads you desire, here's just a few examples:
SPY etf
DIA etf
QQQ etf
IWM etf
DELL stock
MSFT stock
ORCL stock
INTC stock

I am looking at all of those stocks & etf's on my live trade station
right now as I am writing this and January At the Money options.
Bid to Ask is varying between .01 to .02 constantly, which means if its .02, then wait a few seconds or so and it will drop to .01.


Jeff
 
11-28-12 04:31 PM
Quote from jeffalvinson:

The answer to this is:
buy calls on low volatility stocks that have slowly corrected.
Look at the attached chart of INTC that I pointed out yesterday
to another member.
Great company, everyone uses its products, big correction.
INTC open today at 19.90
The INTC JAN 17.5 Calls opened at 2.58
That's 2.40 ITM of intrinsic value or 93% ITM.
That's a Delta of .86 (close enough to 90).
If the stock moves 10% (like the Op's profit goal),
in 15 days (Op said 7 days average but INTC moves slow) then the INTC Jan 17.5 calls worth 4.40 ( +70%).
If it takes 30 days to move up 10% the
INTC Jan 17.5 calls worth 4.39 ( +69%).
If INTC drops -8% (Op's Stop Level) in 15 days the
INTC Jan 17.5 calls are worth 1.26 (-51%).
If it drops -8% in 30 days the
INTC Jan 17.5 calls are worth 1.09 ( -58%).

Honestly here an -8% stock drop is to large in my opinion.
-5% is more reasonably and a -5% drop in INTC stock in 15-30
days would place the value of the INTC Jan 17.5 calls options at
1.70 (-34%) in 15 days and 1.56 (-40%) in 30 days. Much better.

Jeff
More...

To show how smoothly a quality large cap low volatility stock moves using 2nd month ITM options,
on 11-28-12:
the INTC stock was at 19.90
the INTC Jan 17.5 calls were at 2.58

In the past 2.5 weeks INTC stock dipped lower to 19.46 and
The INTC Jan 17.5 calls dipped with to 2.18 (-12% drawdown).
Then the stock has been as high as 20.99 (+5.4%) and
the Jan 17.5 calls as high as 3.50 (+35%).
Its currently at 20.51 (+3%) stock price and 2.98 (+15%).

ITM second month, high quality large cap, low volatility
stocks that have recently sold off at or near a 2 year support,
are a relatively low risk strategy.

Jeff

Note: If you read back through most of my option trades, I am looking for a +30% profit most of the time. INTC would have easily hit that and I would have moved on to the next trade.
 

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