Day Trading Options - How to choose the right strike?

[tradinginaz]

I've been trading for over 13 years but am new to options. Most trades of mine are an hour or less. Everyone says to day trade deep in the money options with deltas of 90 or more. It doesn't make sense to me though.

Example:
Option 1: MSFT weekly put option with a strike of 43.50 and a delta of -.55 is .71.
Option 2: MSFT weekly put option with a strike of 45.0 and a delta of -.97 is 1.79.

Why wouldn't I just buy 2 option 1 puts for a total price of 1.42 and really a better delta when combined vs spending 1.79?

I appreciate any responses.

 

[mmt]

I am going to assume you can only trade option 1 or 2 as much as possible.

If you want to build a short as possible position, paying the least premium possible, then you would want to buy option 1 over option 2. However this doesn't mean that option 1 will be more profitable (or lose less money) than option 2.

 

[J_Smith]

I've been trading for over 13 years but am new to options. Most trades of mine are an hour or less. Everyone says to day trade deep in the money options with deltas of 90 or more. It doesn't make sense to me though.

Example:
Option 1: MSFT weekly put option with a strike of 43.50 and a delta of -.55 is .71.
Option 2: MSFT weekly put option with a strike of 45.0 and a delta of -.97 is 1.79.

Why wouldn't I just buy 2 option 1 puts for a total price of 1.42 and really a better delta when combined vs spending 1.79?

I appreciate any responses.

I have just started some daytrades with options due to personal circumstances.

What makes u think that buying 2 x Option 1 will have a better delta than Option 2.

If you buy high delta then u will nearly have same movement as stock (ignore volatility for now ) which means u can lose as much as if bought stock - agree!

J_S

 

[tradinginaz]

Well consider the following. If MSFT moves in my favor in the example above by $1 I make the following:

Option 1: $1 X 2 Contracts X 100 shares X .55 Delta = $110
Option 2: $1 X 1 Contract X 100 shares X .97 Delta = $97

I made more on option 1 in the example and it cost less to purchase option 1. $142 vs $179

Thus my point of not understanding why you would buy the higher delta?

 

[enjoytrading]

You will have better liquidity and convexity in Option 1. Option 2 will essentially let you replicate a stock position with much less cash but probably much higher transaction costs.

I'd stick to learning how to buy and hold options for a little while first instead of day trading them.

 

[OTM-Options]

Day trading options is impractical due to the bid/ask spread. If you want to hold them for a short period of time consider opening a position just before the market closes and exit the position the following day when the market opens.

Try and profit from After Hour and Premarket gaps.

 

[J_Smith]

Well consider the following. If MSFT moves in my favor in the example above by $1 I make the following:

Option 1: $1 X 2 Contracts X 100 shares X .55 Delta = $110
Option 2: $1 X 1 Contract X 100 shares X .97 Delta = $97

I made more on option 1 in the example and it cost less to purchase option 1. $142 vs $179

Thus my point of not understanding why you would buy the higher delta?

I see your point now, but you have double transaction costs of course - once gain is more for same move, if it is in practice, then I can not see any problem with what u have said.

However, as pointed out by others who prob have more experience than us with options, the spread is crucial if you have worked out your target - no good having a spread of 0.10 if you are only looking to make 0.15 to 0.20!

For me tight spreads are a must, and thus will govern what strikes u pick to a degree - right now I am finding theory is sometimes irrelevant, but if you go too far away from current price of underlying, do not be surprised to see delta change very quick with fast move, and u cud be left holding a pile of shite with a few days to expiration - unless of course u do as u intended and daytrade only for very short term moves - it's a fine balancing act I think, but I also think it is viable with correct stock selection and correct setup to enable you to make quick decisions and executions.

I am currently trying to identify a second instrument to trade with my stock selection to try and suck a few cents outa the market between 2 daily points - getting there bit by bit, but maybe someone wud like to shorten my learning curve

J_S

 

[Jones75]

I see your point now, but you have double transaction costs of course - once gain is more for same move, if it is in practice, then I can not see any problem with what u have said.

However, as pointed out by others who prob have more experience than us with options, the spread is crucial if you have worked out your target - no good having a spread of 0.10 if you are only looking to make 0.15 to 0.20!

For me tight spreads are a must, and thus will govern what strikes u pick to a degree - right now I am finding theory is sometimes irrelevant, but if you go too far away from current price of underlying, do not be surprised to see delta change very quick with fast move, and u cud be left holding a pile of shite with a few days to expiration - unless of course u do as u intended and daytrade only for very short term moves - it's a fine balancing act I think, but I also think it is viable with correct stock selection and correct setup to enable you to make quick decisions and executions.

I am currently trying to identify a second instrument to trade with my stock selection to try and suck a few cents outa the market between 2 daily points - getting there bit by bit, but maybe someone wud like to shorten my learning curve

J_S

Concentrate on super tight bid/ask spreads, and understand implied volatility inside and out, and then the rest will come a lot easier to you.

 

[xandman]

If your just punting delta intraday, go where the gamma (and volume) is: Near term, near ATM with some reactivity to aggressive bid/offers in the option chain.

 

[J_Smith]

Concentrate on super tight bid/ask spreads, and understand implied volatility inside and out, and then the rest will come a lot easier to you.

K, we have details on IV as follows...

www.investopedia.com/articles/optioninvestor/08/implied-volatility.asp

We have identified tight bid/ask spread as per trade - there is nothing better to explain than with a live trade, so I have put on the following trade to discuss same, went long 2 as per TZ's first post - I don't mind losing $50 odd to further a good discussion, and who knows, maybe it might even work out if aapl makes a nice move up before tomorrows's open as per OTM's post?

As far as I am concerned the money is now gone - hopefully we will learn something of value from my little loss

So, a few questions?

Should i have taken this trade at all - let's just say it is a normal trade and not for discussion?

What should I set my target gain at in case the trade works out ok - I know my max loss?

When should I exit - should I look to close if aapl moves up at open tomorrow, or should I try get some money back if aapl does not move and we hang around tomorrow for a bit and goes nowhere - if aapl gaps down a good bit then there might be no point in closing?

Did I choose the right strike?????

J_S