I'm mostly referencing ETF's because they protect on short trading against company buyouts/ a good amount of liquidity and volatility depending on the given ETF. So my question is, for speculative trading purposes, not investing, are there any real advantages to trading an ETF's option vs the underlying ETF itself if I had no desire to ever own it at expiration. nor write any naked contracts? Just referring specifically to 'buying to open' and 'selling to close' trades. Seems there are more disadvantages with time constraints/ decay. Would appreciate any insight others might offer thank you.
For speculative trading, are there any real advantages to trading ETF's vs ETF options?
- Thread starter Bugsy
- Start date
Robert Morse
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Options provide more leverage if you want it.
Bob
Bob
There’s good and bad about both. Outright trading the ETFs tie up more capital, you can position size for assumed risk but can’t 100% know it for sure because of gaps if you’re holding more than intraday. But Your delta is truly 1(100)and you don’t have other variables working against you.
Others have pointed out some good points of options. Insane Leverage of course and if you position size the option premium to equal your whole risk you’ll never be surprised by a gap or anything that increases your risk. Plus for the risk you’re taking the leverage is great. Of course with options you have to familiarize yourself with the Greeks, theta is a big pitfall if you’re holding for multiple days especially on shorter term options that offer the greatest leverage. Then the issue of delta arises 1 contract equals 100 shares but ATM options will generally give you a delta of around .50(50) the deeper you go ITM the greater delta you’ll have and the less theta decay but they’ll be more expensive options, so greater risk. ETFs tend to be less volatile and can range trade or move gradually which has to be considered when buying options, will the moves be great enough to offset theta extrinsic value? Again there’s so many things involving options I could go on and on. Not to be a downer on options I prefer them. Like you said I could give a rats about owning 100 shares of XLK and I don’t really feel like tying up 6800 per 100 shares of Capital for something I could use that ties up a few $100. All said and done there benefits and negatives you need to be aware of with options, and consider how they’d effect your strategy.
Others have pointed out some good points of options. Insane Leverage of course and if you position size the option premium to equal your whole risk you’ll never be surprised by a gap or anything that increases your risk. Plus for the risk you’re taking the leverage is great. Of course with options you have to familiarize yourself with the Greeks, theta is a big pitfall if you’re holding for multiple days especially on shorter term options that offer the greatest leverage. Then the issue of delta arises 1 contract equals 100 shares but ATM options will generally give you a delta of around .50(50) the deeper you go ITM the greater delta you’ll have and the less theta decay but they’ll be more expensive options, so greater risk. ETFs tend to be less volatile and can range trade or move gradually which has to be considered when buying options, will the moves be great enough to offset theta extrinsic value? Again there’s so many things involving options I could go on and on. Not to be a downer on options I prefer them. Like you said I could give a rats about owning 100 shares of XLK and I don’t really feel like tying up 6800 per 100 shares of Capital for something I could use that ties up a few $100. All said and done there benefits and negatives you need to be aware of with options, and consider how they’d effect your strategy.
True, although you also have a lower chance of making money compared to simply buying the underlying.
The pros and cons are no different than comparing trading the underlying vs the option of any other security.
As a long time swing trader I trade only ETF's & stocks. The time decay, expiration, lack of liquidity, & high trading cost are why I never have, or never would use options - to many things working against me.
Options.. less risk? This study shows the risk in options was nearly two-fold higher compared to stocks. Derivatives transfer $ from the many to the few.
"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.”
http://sjoptions.com/portfolios/option-traders-lose-money/
Options.. less risk? This study shows the risk in options was nearly two-fold higher compared to stocks. Derivatives transfer $ from the many to the few.
"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.”
http://sjoptions.com/portfolios/option-traders-lose-money/
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Why not turn it around and make time working FOR you? Sell vertical calls and puts, your loss is limited but time is suddenly on your side. You also make money if the stock doesn't move much, so out of 3 possible movements (up, down, sideways), in 2 you make money....