Best strategy for small moves ?

J

J-Trade

I'd appreciate comment from experienced option traders on the best option strategy for the following, please : I have a simple screen that produces stocks for small gains, 1 - 3%, typical trade duration 1 - 5 days.

My research suggests the following two alternatives, both front month up to 15 days to expiration, then second month.

* Debit call spread ATM/OTM : lower cost for better ROI, but lower position delta;

or

* Deep ITM calls (delta >0.9) : much more expensive, but much higher delta.

Many selections are mid-caps with low vol options; this Monday's were (gain after 2 days)

AKRX + 3.48%
CDNS + 0.42%
HPY + 3.23%
TEX + 3.36%

SPY up 0.35% for comparison.

Do you think this is viable with options - targetting 3% gains - and which/what strategy would you use ?

J.
 
Quote from J-Trade:
----best option strategy....
----stocks for small gains, 1 - 3%, typical trade duration 1 - 5 days.
----alternatives....
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1) If you're "good" at identifying price trends in the underlying stock, stick with that. :cool:
2) To attempt to replicate the same strategy with options can be tougher because of unpredictability among the greek variables. :eek:
3) Bid-ask spreads in outright options and options spreads can be wider than that of the underlying stock which will diminish your profit potential. :( :mad:
 
If your screen can reliably predict 2-3% moves in 1-5 days on low priced stocks, trade the stock. B/A slippage and commissions are lower and you won't have to fight that pesky delta or IV fluctuation.
 
Thanks for your replies.

I understand the advantages of trading the stock. However, this ties up a lot more cash, especially as not all stocks are <$50. I have only $50k to spare for this strategy : how would you trade this strategy with this allocation ? Broker is IB, so comms are acceptable.

It seems that buying the ATM or just OTM call gives the most bang for the buck, provided of course that the directional call is correct. Back tests - which are laborious as the universe of stocks is updated every week - suggest a 70% win rate, which is high.

I am going to forward test from next Tuesday. Almost all my previous & current trading has been with futures and forex, so I just don't yet have any feel as to whether these gains can produce a viable / worthwhile return.

Edit : one more thing re profit potential. I know this may sound strange, but I'm not really concerned about whether I "maximise" my profit or not ! My trading & investing is all about finding good, reasonably business-like approaches to generating return on capital. I want to keep it as simple and as manageable as possible within my limited skill set. If someone else could take the same approach and make twice as much, I really don't care : as long as I make consistent profits. Money isn't everything yada yada ... so sorry, don't where that philosophising came from, must be the Grand Cru we just drank at dinner over here in Europe...
 
how many contract are you trading? and if volume is small your b/a will be huge. Its hard to beat commission and slippage over time trading a small amount of contract with 3% expectation. you have to be almost perfect in in every trade to be profitable over time.
 
Opened a chain for TEX @ $22.70
A 3% move is about 70 cts
Apr 22c has delta of .62 so that's a 40 ct gain if immediate move
Takes 5 days to move 3%? Maybe lose 15 cts TP so net 25 cts.
Not a lot of gain for being right.

Want a higher delta (90+)? Some strikes below 20 have 50-60 ct spreads. Poof, there goes the 3% move's profit.

Want more time? The May 22c has slightly lower delta. 70 ct UL move in 5 days nets you 35 cts or so. Same wide B/A spreads on high delta strikes.

If you have a high rate of success, this may mean little.

If stocks are higher priced, the slippage may be less damaging.

OTOH, if you can nab 70 cts in 5 days with the stock (lower commissions and narrower spreads), IMO, you'll do better since there's twice as much bang per position.


I can tell you from experience that if you have a 65-70% success rate and you manage your losses, you can make a tidy sum from a 3% move on equity volume.
 
Quote from spindr0:
I can tell you from experience that if you have a 65-70% success rate and you manage your losses, you can make a tidy sum from a 3% move on equity volume. [/B]
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Only one way to find out ;) ....

Thank-you everyone who responded.
 
Quote from nazzdack:

1) If you're "good" at identifying price trends in the underlying stock, stick with that. :cool:
2) To attempt to replicate the same strategy with options can be tougher because of unpredictability among the greek variables. :eek:
3) Bid-ask spreads in outright options and options spreads can be wider than that of the underlying stock which will diminish your profit potential. :( :mad:
More...

Disagree on all fronts:

1) Significantly more capital is at risk in the underlying vs the option. Take for instance playing aapl on Wed on gapfill at 619 area-- 100 shares = $ 62k capital at risk....a black swan could crush you (rare and unlikely yes...but the risk nonetheless is there...illusory if one denies it or dismisses it). A 600 deep ITM call cost $ 1930...you get a delta of .94...a terrorist event happens while in trade- less than $ 2k is your entire risk!!!

2) False. Deep ITM practically negates all effects of Greeks...the most important one given immunity on- volatility!! Of course u can get crushed in ATM-- these are where option premiums are highest and can kill you....NOT SO WITH DEEP ITM

3) Of course there are numerous illiquid option series out there that immediately will have you in the whole on the bid side... but there are plenty of liquid high beta options like AAPL that have tight spreads-- in the example above $ .15 to .20 max.

Folks- this is a no brainer. Combine tech analysis, solid mutiliple time frame analysis with a knowledge of where supply and demand is and precisely tuned entries on a shorter time frame with good solid position sizing and risk mgmt/stop loss in place-- options the only way to go.
 
Quote from Riffraffpatrol:



1) Significantly more capital is at risk in the underlying vs the option. Take for instance playing aapl on Wed on gapfill at 619 area-- 100 shares = $ 62k capital at risk....a black swan could crush you (rare and unlikely yes...but the risk nonetheless is there...illusory if one denies it or dismisses it). A 600 deep ITM call cost $ 1930...you get a delta of .94...a terrorist event happens while in trade- less than $ 2k is your entire risk!!!

[/B]
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BTW- this trade went on to produce a 30% return intraday- 6 pts = $ 600 on less than $ 2k skin in game....heelllooooo???!!!!
 
Quote from Riffraffpatrol:
Disagree....
1) Significantly....
2) False. Deep ITM....
3) Of course....
----no brainer.
----tech analysis....
----solid mutiliple time frame analysis....
----a knowledge of where supply and demand is....
----precisely tuned entries....
----good solid position sizing and risk mgmt/stop loss in place....
More...
1) Reasonable points. :)
2) The poster mentioned ticker symbols that are more relevant to what I said earlier, i.e. lower priced and less liquid, sort of the diametric opposite of AAPL. :cool:
3) If indeed, you get all of your "ducks in a row", any method can be "good". :D
 
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