Buying Calls/Puts instead of trading underlying?

[daniel_tysen]

Hi there,

I'm pretty new to options and hope some experienced traders might help to save me a lot of time.

I'm quite good at predicting price movement of different markets like stocks, currencies etc. I'm profitable doing this but not to the extend I think is possible.

My problem is that I get stopped out of a trade quite often, then a few days later it does what I expect it to do. Using wider stops doesn't make it a lot better since that destroys my risk/reward ratio.

Now I thought buying a call option ATM or a bit out of the money instead of the underlying might help me here. I hope to keep a good risk/reward ratio while I can stop using mechanical stops.

The option expiring worthless is my biggest risk, and sometimes I might be able to get out better but I can accept the risk of getting nothing.

I usually need 5-10 trading days until price gets where I expect it to be, so I'll need to hold an option around 7 trading days on average.

What do you think? Is it worth to further get into options for me? Or is it something you'd say forget about it?

Thank you,

Daniel

 

[MTE]

Noone can tell you to forget it. There's no single way or rule of doing things. Options do add more dimensions to trading (namely, volatility and time decay), but they can be dealt with if you understand how options work.

 

[heiasafari]

Like MTE said, when you get into options, you get more variables in the mix, the main one is volatility in your case since you seem to say you can live with time decay. Otherwise I would suggest you browse along the option section for previous discussions about using options as a substitute for the underlying.

As far as I am concerned (as an option trader), I firmly believe there is nothing you can do with stocks that can't be done better with options...

 

[MTE]

Quote from heiasafari:

Like MTE said, when you get into options, you get more variables in the mix, the main one is volatility in your case since you seem to say you can live with time decay. Otherwise I would suggest you browse along the option section for previous discussions about using options as a substitute for the underlying.

As far as I am concerned (as an option trader), I firmly believe there is nothing you can do with stocks that can't be done better with options...

I'm an option trader myself, but I have to disagree with you on your last point, as sometimes the best option is a stock position.

 

[heiasafari]

Quote from MTE:

I'm an option trader myself, but I have to disagree with you on your last point, as sometimes the best option is a stock position.

Well that depends on your personnal situation IMO. For me, being in Canada, being synthetic long on a US stock is much better than actually owning it... Why? 1) I do not need to convert CAD to USD (avoiding exchange rate spreads and fluctuations) 2) Here foreign dividends are taxed as interests, so better have capital gains.

 

[ptrjon]

Over the long term, holding stocks have a huge advantage over options, no loss of time value, and possible dividends.however, for what the OP was trying to do, options will work fine, but be careful.

 

[MTE]

Quote from ptrjon:

Over the long term, holding stocks have a huge advantage over options, no loss of time value, and possible dividends.however, for what the OP was trying to do, options will work fine, but be careful.

You are comparing apples to oranges. Holding a stock for the long term is investing. Options are for trading/hedging, not investing.

 

[erol]

Unless you're projecting a violent move (increase in vol), I recommend itm calls/puts, as they have a higher delta (more leverage) and lower break evens.

 

[erol]

Quote from heiasafari:

Well that depends on your personnal situation IMO. For me, being in Canada, being synthetic long on a US stock is much better than actually owning it... Why? 1) I do not need to convert CAD to USD (avoiding exchange rate spreads and fluctuations) 2) Here foreign dividends are taxed as interests, so better have capital gains.

if you don't mind me asking, which broker do you use?

 

[heiasafari]

Quote from erol:

if you don't mind me asking, which broker do you use?

I use National Bank Direct brokerage but I would not recommend it, I use it because I used to work there so I know most of the option brokers and the trading desk and I can call them when I need to - and that's often unfortunately (they suck), this is an advantage because their web is crappy.

Otherwise I think I would use Interactive brokers because of the low comm on options. Of course that would be until (hopefully) Optionhouse becomes available to Canadians...