Buying Calls/Puts instead of trading underlying?

[noob_trad3r]

I use options for hedging and reducing volatility.

(naked puts to buy stock)
(covered calls to set sell limits)

None of the puts have been assigned (Due to this rally so far)

But I have had stocks called away. Then I turn around and sell puts to get them at a price I want back.

 

[MTE]

Quote from 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.

Actually, the further you go ITM the lower the leverage.

 

[spindr0]

Quote from heiasafari:

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...

If you trade well, stocks are better. If you need time decay to take the edge off your less than ideal timing, options may be better.

 

[spindr0]

Quote from daniel_tysen:

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.

If you're good at predicting price movement of different markets then widening your stops a bit shouldn't be catastophic.

 

[erol]

Quote from MTE:

Actually, the further you go ITM the lower the leverage.

ahh true, I should have left the word "leverage" out and left it at delta. But everything else is correct afaik...

 

[TheGoonior]

If you are purchasing ATM or OTM options, you will need to re-evaluate your risk-reward as well. ATM options will only participate in a portion of the underlying move, according to their delta (about 50% to start) and this percentage will change higher (as it moves in your favor) or lower (as it moves against you).

I like options as a proxy for the stock for the following reasons:

1) Lower capital outlay (hence, lower exposure for the same share size)
2) Larger protection against gaps against you.
3) Can be used to short by purchasing puts (in an IRA, for example).

I don't like the higher spreads or the fact that you can't get the dividend, but you just have to live with higher spreads and if you are a short term trader, I'm guessing dividends take a backseat.

As for brokers, I use TOS for options since I like their user interface (but I have an IB account as well for other stuff)

 

[ramaTrade]

Quote from daniel_tysen:


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.

If you are so confident on direction, then spread orders should work for you. Both vertical spread and time spread should do. Less to none time decay and good risk/reward ratio.

If I were you, I would choose to close the legs separately.

Try the options lab at http://www.TheOptionsLab.com to
test strategies before you put them on.

 

[TheGoonior]

Spreads are great, but one issue is that you are capping both your risk and your reward.
If you typically let winners run as far as you can, then at some point you will either have to buy back the short leg of your spread (eating bid/ask & commission) or use wide spreads (in which case your risk increases due to a reduced premium from the short option).
The upside is that you know exactly what your range of outcomes is, come hell or high water.

If you chose to implement diagonal options (vertical and time spread combined), make sure you familiarize yourself with delta inversion. It's a real kick in the head to be correct on the direction, get a booming move, and not profit like you should (or even lose).

Since you mention rather short term trades, this might not effect you much, but it's something to keep in mind should you extend your trade holding periods.

 

[ramaTrade]

Quote from MTE:

as sometimes the best option is a stock position.

I cannot agree more, know when to use options and when to trade undelying is the trick of the trade. I missed many opportunities just because I always thought in an options traders' way.

 

[ramaTrade]

Quote from TheGoonior:

Spreads are great, but one issue is that you are capping both your risk and your reward.
If you typically let winners run as far as you can, then at some point you will either have to buy back the short leg of your spread (eating bid/ask & commission) or use wide spreads (in which case your risk increases due to a reduced premium from the short option).
The upside is that you know exactly what your range of outcomes is, come hell or high water.

If you chose to implement diagonal options (vertical and time spread combined), make sure you familiarize yourself with delta inversion. It's a real kick in the head to be correct on the direction, get a booming move, and not profit like you should (or even lose).

Since you mention rather short term trades, this might not effect you much, but it's something to keep in mind should you extend your trade holding periods.

The spread I trade is usually a speculative play in that I intend to close out the short leg early when the direction goes against me initially. I know ALL options books oppose it, but I think it is OK if you plan to do so *before* you place the trade.

This way, if the direction is right from start, you make money by cosing both legs.

If the direction is wrong initially, you make money by closing short leg with a profit, then wait for the trend to correct itself. If not, it is still better than outright long.

That goes back to the original assumption, which is how confident are you on the direction given timing is a little off.