I have been conservatively trading stocks and am relatively new at trading options. Is it better to trade ones near expiration, which would be cheaper but have a greater evaporation rate of time value? Or, would the options farther out be better since they would not lose as much to time value, even though they are more expensive? Thanks!
Is it better to swing trade options near expiration or far from expiration?
- Thread starter TraderGreg
- Start date
"Swing trading of short-dated options" would be an oxymoron........and make you a moron. Swing trading implies having a "longer" time horizon than a few days. Swing trading implies being concerned with price movement. With shorter-dated options, you'll have to be concerned with theta, vega and gamma in addition to outright price movement. It's a much tougher challenge, especially for a conservative rookie. Focus more on options that have 2 to 6 months of time remaining so you can "absorb" the greek variables better.
no. do not use back month for swing trading. back month have huge vega risks which is far riskier than theta.
in addition front month trade with thinner b/a spreads which make them far better trading vehicles, expectancy wise.
if theta is a concern then an itm front month might be used, which basically provides close to 100 deltas without any gamma or vega exposure.
dont trade back month options unless you want to trade vega (option implied volatility). there is even more, especially if looking at leaps, but i wont go there, at least for now.
in addition front month trade with thinner b/a spreads which make them far better trading vehicles, expectancy wise.
if theta is a concern then an itm front month might be used, which basically provides close to 100 deltas without any gamma or vega exposure.
dont trade back month options unless you want to trade vega (option implied volatility). there is even more, especially if looking at leaps, but i wont go there, at least for now.
I like options closer to expiration. They afford you leverage for less capital. And in the last 2 weeks before expiration, also great for daytrading with a stop built in.
But dangerous they are (like everything else) if you let your size get out of control. That said, keep your size and capital risk lower than farther out options (or stock) -- they can be slippery... and all quite profitable.
[ie... be careful especially to avoid averaging down as options get further out of the money. if you must average down, change strikes and go at the money or in the money the closer your get to expiration.]
I started trading options in March and only traded front month at first because they were cheap. My first trade was a low risk, but ultimately worthless, pre-earnings trade. IMHO avoid the volatility of front month options pre-earnings unless you a) don't mind a loss, or b) put on a strangle, which worked very well for me the couple times I used it. My next several trades were also front month, which I held for a few days to a couple weeks, and had very strong returns, but unlike my first trade, I spent a great deal of time researching fundamentals, technicals and only when the signals were strong and the market was trending my way, did I put on the trades. In the past month I've been swing trading back month options exclusively and have had my strongest returns ever. Today, however, I got a wild hair and day traded options for the first time, because the options were so liquid and the bid/ask spread so tight (AAPL). I made $475 on 5 contracts in 30 minutes. Day trading front month options definitely seems to have its appeal, as my biggest loss was the result of a gap down that never recovered. Overall, however, back month for swing trades has been extremely profitable for me.
Wow, thank you all for your responses! I think I may start by trading options that are one back in expiration, while executing the same trades in a paper account that are front month. As long as I start out doing only a small number of trades, I think I can track my results better while I remain studying the greeks and time variables. Thank you.
Start small, one or two contracts, until you get the feel of what you are doing.
Trading too large is Number One mistake for newbies. Give yourself at least 6 months, and gradually increase the trading size.
Forget about making any money. Just focus on learning, and consider your losses as tuition.
Best of luck.
Trading too large is Number One mistake for newbies. Give yourself at least 6 months, and gradually increase the trading size.
Forget about making any money. Just focus on learning, and consider your losses as tuition.
Best of luck.
One last thing.
While others may have some good ideas, these ideas may not fit your trading style. The question on how far out to go with options is a relative question == there are trade-offs on any approach.
In the end, YOU will become the expert on this type of trading for your style. Make some money and come back and tell us the "correct" answer to your question.
Try both short term and long term options in small quantities in multiple markets, and see which seems to fit best for your style and for the different types of markets.
In swing trading, you might try verticals, calendars, etc, so the position itself may change as well. Generally you want to be theta positive (making money on time), but you might find that you are a great trader at earnings where time decay may not be an issue.
While others may have some good ideas, these ideas may not fit your trading style. The question on how far out to go with options is a relative question == there are trade-offs on any approach.
In the end, YOU will become the expert on this type of trading for your style. Make some money and come back and tell us the "correct" answer to your question.
Try both short term and long term options in small quantities in multiple markets, and see which seems to fit best for your style and for the different types of markets.
In swing trading, you might try verticals, calendars, etc, so the position itself may change as well. Generally you want to be theta positive (making money on time), but you might find that you are a great trader at earnings where time decay may not be an issue.