Daytrading options

[cunparis]

I have some stocks I trade, I always enter on the open and exit on the close, usually the same day but sometimes I hold a week.

Many of the stocks are low volume and so I'm limited in how much money I can trade without driving the price.

I'm curious if I could use options instead of trading the stocks? I know options aren't super liquid either so I don't know if this would give me an advantage or not.

My main reason for wanting to do options is to have additional leverage. I'd buy the option at open and sell on the close the same day or a few days later.

This may not make any sense but I thought I'd ask.

Thanks

 

[options4me]

Look at QQQQ for daytrading of options.
Liquidity is NO problem.
Made one daytrade today on it and got pretty much instant fill on the open and close.

The trick to trading options is you have to look for a large Open Interest and volume. Only trade those strikes if you want to be fluid. Buying on the open and selling on the close may work, but there are better ways.

 

[dagnyt]

Quote from cunparis:

It sounds as if you want to trade options on individual stocks.

You plan has zero chance of working in today's climate.

1) Bid-ask spreads are very wide. If you enter a market order you will get creamed.
Never use a market order.

2) If you use a limit order near the midpoint of the bid/ask spread, you have a chance to get filled, but if there is very little volume in the options, then you are at the mercy of the market makers.

3) The combination of not knowing if you will get a fill coupled with those very wide markets makes the idea of grappling with those bid/ask spreads twice in one day a very bad idea.

4) As mentioned, if you want to trade an index with tight bid/ask spreads, that's different.

5) If your stock is like AMZN or IBM etc with lots of volume, then you may be able to this. Buit again, it more difficult to day trade options.

6) Are you aware than options are often priced so that stock movement does not matter? Do you know that in today's environment option prices can remain unchanged even if the stock makes a substantial move?

The point is that a sudden change in IV (implied volatility) can more than comoensate for a 5% move in the stock price. Options do not behave like stocks and it takes a VERY DIFFERENT skill set to trade them. And day-trading is far more difficult,

Please be caeful.

Mark

 

[cfredstan]

Dagnyt could you please elaborate more on how the IV really affects the price and not the stock movement as much. I have definitely noticed that, but I would like to here your interpretation.

 

[lemeeeplay]

Quote from dagnyt:

6) Are you aware than options are often priced so that stock movement does not matter? Do you know that in today's environment option prices can remain unchanged even if the stock makes a substantial move?

This is very true.

The current implied on the qqqq's is at 68% with delta for at the money at around 0.5. You’ll need the market to swing in excess of 3-6% per day for you to see a decent change in your option price. It's just not worth day trading it.

 

[dmo]

Quote from cfredstan:

Dagnyt could you please elaborate more on how the IV really affects the price and not the stock movement as much. I have definitely noticed that, but I would like to here your interpretation.

Let's say the SPY is sitting at 87. The SPY 87 calls are 6.70 bid, offered at 7.30. Somebody comes in wanting to buy 10,000 of those calls. He buys all the calls offered at 7.30, then buys all the calls offered at 7.35, then all the calls offered at 7.40, etc.

By the time he's done, he's taken out all the offers up to 7.90. The market for those 87 calls is now 7.90 bid, offered at 8.50.

All this time, the SPY itself has not budged. So what has changed?

What's changed is the implied volatility. It's the extra dimension of pure supply and demand for the option itself - independent of the movement of the underlying security. That in and of itself moves the price of options, independent of the underlying going up or down. So it's vitally important to take that into account. Otherwise you are trading blind.

 

[dagnyt]

Quote from cfredstan:

Dagnyt could you please elaborate more on how the IV really affects the price and not the stock movement as much. I have definitely noticed that, but I would like to here your interpretation.

The previous reply pretty well says it all, but look at it this way:


Assume: IV is 80, stock is 100 and you buy a 110 call in the morning. Expiration 6 weeks away.

If stock rallies to 105 in a general market rally, you may see IV drop to 60. I don't know what the option's price would be - but it would probably be LESS than you paid - even without the passage of time.

A day trader would not be able to make ny money - yet the stock moved 5%.

The point is that options are packed with fear, greed, and other emotions right now and when you buy or sell them, you never know how much additional fear premium will be pumped into the options to raise it's price, or out of the option, to lower it's price.

The effect of IV is so significant in today's market, that the price of the underlying stock is almost immaterial.

Mark

 

[forex-forex]

Quote from options4me:

Look at QQQQ for daytrading of options.
Liquidity is NO problem.
Made one daytrade today on it and got pretty much instant fill on the open and close.

In todays market with IV so high you are much better off day trading NQ Futures, instead of QQQQ options.

 

[dagnyt]

Quote from forex-forex:

In todays market with IV so high you are much better off day trading NQ Futures, instead of QQQQ options.

If he's going to do that, he's better off trading the stocks that he knows.

That's where we began. day trading stocks. He was looking to use options as a replacement. Hopefully, he has changed his mind.

Mark

 

[forex-forex]

Quote from dagnyt:

If he's going to do that, he's better off trading the stocks that he knows.

That's where we began. day trading stocks. He was looking to use options as a replacement. Hopefully, he has changed his mind.

Mark

My response was to options4me, post #2. It would be interesting to compare options4me QQQQ option day trade to a NQ Futures trade covering the same time frame to see how they match up.