Buying Put Options instead of Shorting

[ironchef]

The leverage for example, might make your put options move 10 to 1 compared to the stock price but that won't change the percentage difference between your bid and ask for the options.

Am I thinking right with this example?:
Say that I could buy one share of a large volume stock trading with a bid/ask of $9.99/10.00 for a purchase price of $10.01. I lose just 1¢ for the spread. I have a target of $10.30 and a stop of $9.71. For simplicity, let's say there's a 50/50 chance it can go either way. If it hits my target, I stand to gain 30¢ or about a 3% profit. If I lose, and it hits my stop, I stand to lose 30¢, for about a 3% loss.

Now if I could buy an option that for simplicity sake, moves with 10 X leverage. The option bid ask would be $1/1.20. I would buy one option at $1.20. If the stock moved as before up by 3%, the option would move 10 X 3% = 30% to a bid/ask of $1.30/1.55. I could sell the option at $1.30 for a 10¢ profit. If the stock moves down 3%, the option bid/ask moves down 30% to $0.70/0.84. I would sell at $0.70 for a loss of 50¢. So the way I see it, I'm taking a chance of losing 50¢ in the hopes of just 50% of the time that I gain 10¢.

If you trade options using market, you will buy at ask and sell at bid. But on ET we don't trade on market orders, we always use limit orders. Usually but not always, you can buy/sell at roughly mid between bid/ask so the slippages are not as bad as you said.

You won't get mid if you are DOTM or DITM. With DITM you usually get less than intrinsic if you sell to close and for DOTM often the bid/ask are so wide you are better off not trade those.

Good luck.

 

[SoesWasBetter]

The b/a on many options is a big problem. You might get a fill in the middle both ways, but don't bet on it. And don't bet on getting a fair price when the thing moves your way. They love to keep the bids at GYP levels, to victimize YOU.

 

[SoesWasBetter]

Sam, I think there is just a better market for the stock - more buyers and sellers, driving the bid/ask close together. Not that big of a market for the options, thus a wider spread. Nothing funky with the math.

That's the excuse, but it makes no sense. There is a fair value. They could make a market x cents either side of that, No real reason to make the spread 20 to 50 VOL wide.

 

[neke]

That's the excuse, but it makes no sense. There is a fair value. They could make a market x cents either side of that, No real reason to make the spread 20 to 50 VOL wide.

You realise that option price is a guess-timate - so thinking mid is fair value would be detrimental to the market maker. If someone with better knowledge hits the ask (with spread of 1cent) with volume, forget about the prior 'fair value', it is no more the fair value. It is that uncertainty that compels them to demand a bigger cut.

 

[Sam Mcgee]

I gave it some more thought today and I think my method of trading would actually work by buying put options instead of shorting. Typically when I trade long, I might be averaging a profit/loss of about 1%. I can count on about 0.2% for my slippage, commission etc. So my average profit should be around 0.8%. When I look at the bid ask spread for put options, the lowest I see is around 1 to 2% so instead of 0.2% slippage, I'm probably going to end up with about 3% slippage. However, because of the leverage, my average profit should be around 10%, instead of just 1%. That would leave me with a net average profit of 7%.

I experimented today with the trading simulator on Interactive Brokers. I shorted about $65,000 of NFLX which was 225 shares. I also bought 80 put options for around $65000. My expense to short the 1000 shares, might be around $100 for slippage and commission. My expense to buy the 80 puts might be a lot more at around $1200. However you can see that the profit for my puts makes the expense worth it.

 

[darp]

There is an article about how to short stocks like TSLA with 77% likelihood to win, small risk and high profits of stock does anything except go up a lot. It makes good profits at sit still, and has big positive Theta. Here is link. https://seekingalpha.com/instablog/...hance-win-make-35-percent-sits-still-low-risk

starts like this

How To Short Tesla With 77% Chance To Win, Make 35% If It Sits Still And With Low Risk
Nov. 16, 2018 10:26 AM ET
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8 comments |About: Tesla, Inc. (TSLA)
Summary


Author today bought a TSLA option spread that does everything in the title and more.

A good case can be made this is totally superior to shorting the stock and to another stock option strategy that has been suggested.

This trade makes a 35% profit in 5 weeks if the stock is unchanged, a 189% profit at $365 and a 14% profit if $315 or lower.

Risk is only $425 with a 77% chance of a profit. Bottom line is you have to be very wrong to lose anything. Being a little bit wrong generates the highest profit.

Sound too good to be true? Below you will see an Etrade option calculator for a real trade done 11-13-2018 on Tesla (TSLA) that verifies the above bullets.