Is buying options a mugs game?

[Epicurus]

For the same expiration, IV double, your call options price ~ double.

Ok, thanks for the replies. It got me thinking more clearly about this. IV is the markets perception of future volatilty and compares to historical or realised volatility.

HV is calculated as the dispersion of price around a mean over a given time period. So a stock can be trending up and still have low volatility.

Key is how HV is conventionally calculated. A google search seems to suggest that realised volatility in a month(?) is then annualised and so for an option with a year to expiry you'll be paying for a years typical volatility range?

But to answer my own question, if HV or IV is measuring likely change (up and down) in share price around a mean and not necessarily direction, and it is a theorectical calculation annualising recent volatility, there would seem to be some advantage in picking direction on longer duration options.

That assumes with more time there is more chance for price to move away from the theoretical annualised recent price ranges as measured by HV, which in turn influences IV, if you're good enough to pick trends on the longer time frames (I talking 5mths to 18mths to expiry for me).

Alternatively, there is more potential for error in the theorectical calculation of HV for longer time periods.

I think?

 

[Global OptionsTrades]

It would mean that there actually is some optimum timeframe(s) for buying single leg options, subject of course to one's ability to determine direction. Any thoughts.

Go back to basics.

Calculate the trend of the security that you're analysing, and let that drive your timeframe to get optimum exposure with a single option.

Check my journal on here to see exactly this process repeated over the last few months for several securities. P&L is shown for each trade, too.

 

[Pkay]

Go back to basics.

Calculate the trend of the security that you're analysing, and let that drive your timeframe to get optimum exposure with a single option.

Check my journal on here to see exactly this process repeated over the last few months for several securities. P&L is shown for each trade, too.

How do you let the trend drive the optimum timeframes? Also, are you talking about buying options here, not selling? Thanks.

 

[Global OptionsTrades]

How do you let the trend drive the optimum timeframes? Also, are you talking about buying options here, not selling? Thanks.

We are all aware that the past is not a guarantee of the future etc, but if when backtested a security can be seen to move in a trend over a timeframe of 'x' from low to high, and IF the trader decides to trade the trend AND use options to do so, it makes sense to purchase an option with a sufficient timeframe to expiry to capture the trend.

 

[qlai]

IF the trader decides to trade the trend AND use options to do so, it makes sense to purchase an option with a sufficient timeframe to expiry to capture the trend.

Besides leverage, any advantage over just using the underlying? The only thing I can think of is that your stop loss is baked into the trade.

 

[Pkay]

We are all aware that the past is not a guarantee of the future etc, but if when backtested a security can be seen to move in a trend over a timeframe of 'x' from low to high, and IF the trader decides to trade the trend AND use options to do so, it makes sense to purchase an option with a sufficient timeframe to expiry to capture the trend.

Thanks I think I sort of understand this but being a bit thick here. Any chance you can give an example of what you mean? If say, on the daily for frame you see a stock breaking the 200 MA to the upside, is that a signal to buy a call option or is this too simple? Thanks mate!

 

[Global OptionsTrades]

Besides leverage, any advantage over just using the underlying? The only thing I can think of is that your stop loss is baked into the trade.

For me, (and in relation to simple directional / swing trading) limited downside vs unlimited upside.

When I used to trade Futures, the Stop was often a cause for frustration; i.e. long position is stopped when price falls, but then I wasn't in the position when it price subsequently rose. I don't experience that with options.

 

[Global OptionsTrades]

Thanks I think I sort of understand this but being a bit thick here. Any chance you can give an example of what you mean? If say, on the daily for frame you see a stock breaking the 200 MA to the upside, is that a signal to buy a call option or is this too simple? Thanks mate!

I take a slightly different approach.

I know what the average movement between low and high is for each security I track. As an example, its 4.2% for S&P500.
I also know what the duration of the swing from low to high (and high to low) is. For S&P500, its c.45 days.
If I buy an At the Money option at each reversal, I can usually expect to capture some of that 4.2% move during the next 45 days(*).
Its not complicated to buy an option that will expire 45 days out.

As you can see from my journal, I also buy an Out of the Money option, priced c.4.2% away, usually for pennies, which will sometimes offer massively geared profit.

(*) this ignores volatility which is another discussion. In summary, I'm usually buying and selling relatively high volatility, which is ok. I do other trades (as per the journal) to profit from increased volatility.

NB For avoidance of doubt I never use 200 day MA.

 

[Wheezooo]

PKAY,
I was always a net long options trader. Slept better that way.

Mathematically options are priced in a manner where there is no advantage to being short or long. That is what 'Priced to Fair Value' signifies. Speaking as a professional options trader, my advice is to keep away from them like the plague (for speculation purposes). With options it is simple. For whatever you get you must give something up of equal value to get it. If you don't know what that is you are giving up, more reason to keep away.

-Wheezooo

 

[Wheezooo]

I'm a discretionary trader and have built up over many years a good level of expertise in technical analysis focused around classical charting techniques. After working with stocks, then warrants, I started trading single leg options as a way to express directional views.

I've done enough of this to know through experimentation that option pricing is too efficent at my typical trading timeframe of up to 3mths to be profitable. Any edge I have in picking direction disappears in buying single legs, over muliple trades.

Where I have been successful though is in longer times out to 18mths. I've read somewhere that option pricing models such as black-scholes cant account for trends. I also cant understand how a market maker could effectively price volatility as you go futher out in time given the degree of movement that can occur in an individual stock.

My thinking is that buying single leg stock options (moreso than index) on say 5month to 18mth timeframes and maybe 5% OTM (subject to a view on strength of trend) should more genuinely reflect any edge I may have in directional trades. I.e. that pricing of volatility doesn't properly discount my directional view the further out in duration you go.

The trouble is that this takes years to test through experimentation and so I'm interested in understanding a theorectical or practical basis of how market makers account for longer dated options? It may that they don't price trends and simply hedge their risks on longer duration, which is fine by me.

It would mean that there actually is some optimum timeframe(s) for buying single leg options, subject of course to one's ability to determine direction. Any thoughts.