ADVISORY: The following relates only to using an options pair for trading in lieu of a stock pair, or as an addition to a stock pair. Don't waste your time with it if you have no interest in the subject. Perhaps it is a better subject for another location to post, but for here, it is a reply in courtesy to cdcaveman.
You just asked the $ 64,000 question.
http://www.imdb.com/title/tt0047701/
When I started doing trades like this (unfortunately ROI potentials almost never came up THIS good), I looked into doing options for routine use as a proxy to stocks. (I know the very basics of options, that's all.) I was very disappointed because of the numerous reasons that appeared to me would not let options work. (Even someone with a rudimentary understanding like me could see this.). So I sadly dropped the interest using options.
I found THIS current trade because the pair was on an old watch list I had of former pairs I had traded. Approaching Aug 1, it appeared to be such a high probability trade for BIG success, it energized me to try again looking at options. Especially so because many of my other trades are with stocks trading medium low to very low volume, but this pair trades with more than that; I expected to find a richer field of options choice. I found, yes, better choices than I would find in my other trades, but still very inefficient choices. Again I was disappointed.
To put the final kabosh on my interests in using options, I checked out a forum (or is it a thread ?....I don't know the difference), on using options with pairs on ET. It was only a handful of pages and all Greek to me (pun intended). My only take-away was in spite of these posters obviously knowing what they were talking about, (1) they were befuddling each other, and (2) inconclusive between themselves for any consensus. So if the rocket scientists can't find an efficacious way of using options, what am I trying to
accomplish?
With a pair as good as HOT HST's Aug 1 opportunity, I would be ok using even an inefficient pair of options. I think I saw that possibility with this pair's field of options. But even so, I did not enter for the following reason (as flawed as it may be): It seems reasonable the narrowest bid-ask spread is at/near the stocks' current trading price. Typically, I would only find at best a 10 cent spread, at the narrowest. So if I opened an option position on each leg with the options' bid-ask spread working against me (I hit the best bid or lifted the best offer), that inefficiency may be tolerable. My BIG concern is that over time--many weeks perhaps, as may be the case with my swing trading--the trading prices of the stocks move quite away from where they were when I entered the options trade, causing the bid - ask spread in the options to become intolerable as the time comes to close the options. And that is when the trade moves IN my favor ! Should the trade move away from me, I'm looking in the face of causing injury on top of injury. No thanks.
Perhaps, I am looking at the wrong thing in options. Maybe I should be matching options by manner of their greeks, if that is even possible, regardless of what appears to be a mismatch between a call's and a put's respective strike and expiration date. But what appears to be a match at the open may be a huge mismatch over time in a position with them, as the greeks in the call drift largely away from the greeks in the put AS the stock pair moves, and may move dramatically. Intuitively--which is all I have in lieu of knowledge--these dynamics would make what appeared to be sensible in the open become senseless while in the trade.
Totally bewildering to me. Or am I over thinking this ? (Thinking is a generous word to use, as I don't have the knowledge of options to put my arms around this. And if I did, I don't relish getting into a conversation with another of like knowledge as the one I described earlier.)
