buying stocks vs. options for short term trading

S

stockmarketbeginner

Hello,

Lately I've been buying stocks with the intent to sell them a few days or a few weeks later. I sometimes feel like I have a good sense when a stock might go up (I will need enough real or paper trades over time to see if this is just luck). When that happens, I go buy 100-200 shares and then sell them for a profit.

But if I'm just trying to get a quick upward move on the stock, should I just buy the option?

If I bought an option for $1.00 per share, and the stock price quickly goes up by $1, then maybe that $1.00 premium is now worth $1.70. So if I bought 2 options, that would mean I make $140. Since it cost me $100x2 for two options contracts, that means I made $140 on $200 invested, which is a 70% roi. Or if I get it completely wrong, the most I am out is $200 (minus trading costs).

So if I am anticipating a short-term price move upward (but aren't particularly interested in keeping the stock), is options trading a more sensible vehicle than buying the actual stock?

I almost feel that buying the stocks is the wrong method of transportation to get to the same place (a quick buy/sell on price appreciation). It is like taking a car to get the mail out of the mailbox. Sure it's possible. But the lighter weight thing to do would be simply to walk down the driveway to the mailbox and back. I feel like buying a few options is the lighter weight way to get to the same place.
 
Your ROI will be larger with an option . . . if you're correct.

Your LOI will be larger with an option . . . if you're incorrect.


To me, the advantages in options are (at least) two-fold:

1. you can construct more elaborate P/L instruments due to their "nonlinearity".
2. you can use your capital more efficiently. You might decide to "lever up" (CAUTION) or perhaps you just want to trade a small amount of your capital in higher-risk strategies.

There are other issues, which can include exposure (positive and negative) to time decay and volatility. Neither has any bearing on stock price.
 
jimmyjazz said:
Your ROI will be larger with an option . . . if you're correct.

Your LOI will be larger with an option . . . if you're incorrect.


To me, the advantages in options are (at least) two-fold:

1. you can construct more elaborate P/L instruments due to their "nonlinearity".
2. you can use your capital more efficiently. You might decide to "lever up" (CAUTION) or perhaps you just want to trade a small amount of your capital in higher-risk strategies.

There are other issues, which can include exposure (positive and negative) to time decay and volatility. Neither has any bearing on stock price.
More...

Thanks for your response. I used to think options were exotic things for risk-takers and very sophisticated people. While I still think that has truth to it, I'm also thinking that options can be thought of as a tool for a task. If it is the right tool for the task, then use it.
 
The Fact is nearly all pure option traders lose money. You may want to look over these articles - at least to get a different perspective. I know it's tempting. My friend worked at the largest U.S. broker at the time and had warned me to steer clear of options since the net positive accounts for pure options traders is horrendous.

Stock trading is not a zero sum game, trading options is.

http://sjoptions.com/portfolios/option-traders-lose-money/

https://seekingalpha.com/article/3993162-3-pitfalls-options-trading
 
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Stocks that are heavily traded or in play usually have a nice tight bid/ask which is directly related to liquidity. Take a look at the volume, open interest, and especially the bid/ask in the option chain. Super liquid or heavily traded stocks do not guarantee that the options will be liquid as well. Too many stocks have absolutely horrible markets made on the options side of things. Not to mention buying in the money calls. Markets on ITM calls can get too wide even in a tight,liquid option market. You don’t want to make 60 or 70 cents on a 1 dollar call and cough up 30 or 40 cents of it when you sell because the options are illiquid and the bid/ask is ridiculous. If you want to scalp or swing trade buying options make sure the options are liquid. Also understand that 2/3rds of the time volatility is contracting. That’s why the trade of the year has been to sell volatility into your hands bleed. Also,every day that passes your days until expiration get shorter and shorter. Both volatility contraction and the passage of time will cause the value of your option to decay. You pretty much want that up move to happen quick fast. Before vol and time eat up the value of the option you paid for. Not preaching. Just trading. Thanks
 
To add to jimmyjazz's reply, familiarize yourself with delta which is the amount that the option is expected to move if there's a $1 move in the underlying.

The delta of an ATM call is about .50 so in order to make the same $1 from the calls for a $1 move in the stock, you'd have to buy twice as many. That also means more frictional costs (B/A spread and commissions).

If the call is a little bit out-of-the-money (OTM) and has a delta of .25 then you'd need 4 of them to nab a $1 profit from a $1 move in the underlying.

To reduce the quantity of options, you could buy something more ITM. The more ITM, the higher the delta and the more the call mimics the stock. However, deeper ITM tends to have wider B/A spreads.

Where owning 2:1 or 3:1 options to stock gets interesting is the leverage that they provide if you get more than just a $1 move in the underlying. This is because delta is non linear and it increases as the underlying's price increases. But as jimmyjazz stated, leverage is a double edged sword - larger ROI if you're correct and larger LOI if incorrect.
 
comagnum said:
My friend worked at the largest U.S. broker at the time and had warned me to steer clear of options since the net positive accounts for pure options traders is horrendous.

Stock trading is not a zero sum game, trading options is.
More...

There's a lot of truth in what you said but blanket statements as such are not true. There are a number of option strategies that provide yield or similar return as stocks yet diminish the risk.

As for the stock market not being a zero sum game but the option market being one, how is that relevant for a trader chasing a $1 move in the underlying in a short period of time? If a trader achieves that short term $1 scalp, would it matter someone lost the identical amount (option zero sum) or if share price opened up a $1 in the morning? It matters not since the trade succeeded. The distinction is irrelevant.

The SJOptions statement is interesting:

"OPTION TRADERS LOSE MONEY PER MONTH"

"The most comprehensive study looked at 68,000 Dutch retail investors. It found that from 2000 to 2006, retail options traders lost an average of 4.5 percent each month, while people who just traded stocks lost 1.6 percent.”

And yet they offer 3 levels of option training for $2,399 - $4,999 - $19,999 to "PROPEL YOUR OPTIONS TRADING TO THE NEXT LEVEL". Kinda ironic, isn't it ???
 
And to piggyback even further, there's more to it than delta. 3X options with 0.25 delta won't necessarily behave the same as 1X option with 0.75 delta. Assuming both options have the same vega, then your volatility exposure will be 3X higher with the 3X option trade (as well as augmented fees). This is probably why it is often recommended that someone wanting to trade an option like the underlying trade a higher-delta ITM option (say delta 0.8 or so). It tends to behave pretty much like the stock, with the 0.8 multiplier on gains, of course.
 
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