Day-Trading with options?

[rickcremer]

Quote from jeffalvinson:

2: Use front month SPY options in the 1.35 to 1.85 cost range
that have high trading volume (10,000 to 30,000).
They will usually have a .01 bid to ask spread (that's important)

I noticed that through the day today the Bid-Ask apread was about .04-.06 on all the contracts. I would gusess that's due to a relatively volatile market today (SPY off 3.05, the DJX off 3.16.)

In any case the SPY B-S spread is, as you and others have pointed out much narrower than other options such as the DJX, MNX, etc.

My question to you is, since the SPY options are American style, i.e. can be exercised at any time, how do you handle your OTM and ATM trades as the expiration date nears (if you've not already taken your profits out of the market.) Do you have or use a target date (e.g. 3 days before expiration, 5 days, etc.) to get out regardless of the profit or loss.

Also, would you (or do you), in the case of a credit spread, buy back the short and leave the long leg in place just in case the market made a large move in the long position's direction.

Thanks.

Best

 

[kinggyppo]

Yeah that is the largest spread I have seen on the spy in a while except for fed days. Good advice Jeff, how do decide stop placement and targets, do you use 50%?

 

[dd4nyc]

My question to you is, since the SPY options are American style, i.e. can be exercised at any time, how do you handle your OTM and ATM trades as the expiration date nears (if you've not already taken your profits out of the market.) Do you have or use a target date (e.g. 3 days before expiration, 5 days, etc.) to get out regardless of the profit or loss.

Think about when does early exercise is actually optimal: if you have a call it is not an issue unless right before underlying pays a dividend and option has big enough delta.

For puts there is no such simple rules, but again it applies only to DITM puts, and the difference between sale(except the bid-ask) and exercise pl is not that big.

 

[jj90]

Quote from yayt:

I guess I'm the 1 in. 3:1; I started trading options almost 6 months ago and I am far from blown out ( I initially tried to keep a journal but didnt really gain a benefit from it nor was anyone really reading it)

But are you day trading options?

 

[jeffalvinson]

Quote from rickcremer:

I noticed that through the day today the Bid-Ask apread was about .04-.06 on all the contracts. I would gusess that's due to a relatively volatile market today (SPY off 3.05, the DJX off 3.16.)

In any case the SPY B-S spread is, as you and others have pointed out much narrower than other options such as the DJX, MNX, etc.

My question to you is, since the SPY options are American style, i.e. can be exercised at any time, how do you handle your OTM and ATM trades as the expiration date nears (if you've not already taken your profits out of the market.) Do you have or use a target date (e.g. 3 days before expiration, 5 days, etc.) to get out regardless of the profit or loss.

Also, would you (or do you), in the case of a credit spread, buy back the short and leave the long leg in place just in case the market made a large move in the long position's direction.

Thanks.

Best

Rick,

My last day of trading or holding front month options is the Friday before expiration Friday. In other words for this month of February, the end of the day on Friday February 8, 2008 all positions were closed. Then, starting on Monday of expiration week, I am trading 2nd month options.

Regarding your question on credit spreads, I have to claim complete ignorance and do not know an appropriate answer.
In my 10 years of option trading, I have limited all my trading to the outright buying of calls or puts (simple directional trades only).
I have always felt that options are a risky game to begin with,
so I am not going place a trade to collect a potential .50 credit on a credit spread. However, I do have total respect for those traders who can achieve success with those more complex strategies.
For me personally, its all about a solid return on investment.
For every 10% investment per trade of my option trading account, I expect a 30% to 100% return on a swing trade,
or a -25% stop.
That means a 3% to 10% account gain per trade
or a -2.5% account loss.



Jeff

 

[riskfreetrading]

Quote from jeffalvinson:

For me personally, its all about a solid return on investment.
For every 10% investment per trade of my option trading account, I expect a 30% to 100% return on a swing trade,
or a -25% stop.
That means a 3% to 10% account gain per trade
or a -2.5% account loss.



Jeff

Your money management is sound. I bet the majority who buy premium do not understand and/or do not do what you do.

What would be your answer to the following questions if you do not mind:

1. What expiration period do you use (3 months, 6 months, etc).
2. How long do you hold the option position?
3. How do you decide on the option strike if any?
4. Do you play the same underlying?
5. At any one time, do you hold more than one position. In other words is the 90% of your money in cash?

 

[jeffalvinson]

Quote from riskfreetrading:

Your money management is sound. I bet the majority who buy premium do not understand and/or do not do what you do.

What would be your answer to the following questions if you do not mind:

1. What expiration period do you use (3 months, 6 months, etc).
Answer:
For SPY option trades:
I trade front month options until there is only 1 week left before expiration. Then on the Monday of Expiration Week I switch to second month options. That means currently the last day I will use March options is Friday March 14th. Then on Monday March 17th I will start trading April options.
For ordinary stock option trades:
I use 2nd month options At the Money or Slightly In the Money,
but there is infrequent occassions on low implied volatility stocks where In the Money front month options are the perfect choice because they have almost no premium built into the option price. In those cases, I will use ITM (In the Money) front month options.

2. How long do you hold the option position?
Answer:
For a scalp or day trade: A few minutes to a few hours.
For a SPY swing trade: 1 to 3 days. The average is 2 days.
For ordinary stock option swing trades: 1 to 10 days.

3. How do you decide on the option strike if any?
Answer:
SPY options:
The night before a trade I look at the SPY option tables at www.marketwatch.com .
I look for an option strike that had one of the highest volumes that day ( minimum >10,000 contracts) and had a closing price between 1.50 to 2.50. However the entry price is always different from the closing price because I do not enter a trade until the charts tell me to.
For ordinary stock options read the answer for question No. 1.

4. Do you play the same underlying?
Answer:
The underlying for the SPY options is the SPY ETF.
I do not buy the actual SPY ETF, just the options.
In general, I do not buy stocks, I only trade options.
However when I scalp and day trade I chart the SPX to trade the
SPY options.
When I swing trade I chart the INDU (Dow 30) to trade the SPY options.
Also when I trade options on ordinary stocks, I only trade the options.

5. At any one time, do you hold more than one position. In other words is the 90% of your money in cash?

Answer:
Normally 90% of my money is in cash, but there is sometimes overlap where I am nearing the end of a put trade and I open a call trade before the put trade is closed.
In those instances 80% of my money is in cash.
Also on occassion I trade options on ordinary stocks. In those cases I may have a call trade open on a strong stock and a put trade open on a weak stock. Under these circumstances 80% of my option trading account will be in cash.


Answers are below your questions.
By the way, did you try any option trades this past week?

 

[rickcremer]

Quote from jeffalvinson: Rick, That means a 3% to 10% account gain per trade or a -2.5% account loss.
Jeff

Thanks. That's good advice and about how I trade also. Credit spreads are well suited to my style of trading i.e. risk adverse. I like to know the risk (and potential albeit limited profit) going into the trade. Being risk adverse suited me well during the 35+ years of flying DC-9s and Boeing 767s for a living.

I've gone back to my books (McMillan, Cottle, Bittman, Natenburg, etc.) and have done some more reading on American style options, assignment, etc. The bottom line seems to be that for OTM or ATM options assignment risk is minimal especially for calls. And if one closes out a trade by taking a profit or small loss prior to expiration the chance or assignment is slim to none.

Best

 

[daveb351]

shortorlong: research buying DOTM puts/calls, they usually have a better ROI than near ATM's. I prefer IWM, it too has penny spreads.

Example: 2/22, IWM consolidated all day below 69. At BO to upside you could have bought a Mar75Call@0.30 and easily sold it 2/26 @0.60...that's 100% ROI in 2 days for 30$/contract invested. Can you afford 10, 20+ contracts? You might even make a living daytrading options.

Or the Mar75C@.40 and out @1.00, 150% ROI...but it cost 10 more /contract

Then there's Synthetic ATM Longs/Shorts, where the fun begins.

 

[Option Trader]

If you are buying at the ask with a $.05 spread & selling at the bid, you are giving away $.025 each direction. If you buy 50 contracts, you are giving away $250 each day--assuming the cost is no extra versus stocks. If you are very sure of the direction of the stocks should be IMO the only time you should give away free money like that other than margining issues.