New to options....I generally swing trade stocks and ETFs. My question is if I get a buy signal following a pullback in an up-trending stock/ETF, and I'm expecting the trend to continue, would I buy slightly ITM or OTM call options to (hopefully) capture the next leg of the trend? Would I want to stick with calls that expire 3 months out to fit my swing trading strategy? Any help is appreciated.
ITM or OTM Calls?
- Thread starter ETFswingTrader
- Start date
If you're simply trying to replace a stock purchase with option leverage, then you want ITM.
I heard spreads on ITM calls get wider the deeper you go....seemed like bad news for my strategy at the time. (cash settled index options)
Make yourself a table of two stocks with which you're familiar -- one of higher volatility, one of low volatility.
Start with the capital necessary to control 100 shares.
If the stock gains 1%, what happens to your capital performance?
If the stock loses 1%, what happens?
Do the same with three calls (ITM, ATM, OTM) --
how much capital is needed?
what is the performance with 1% gain?
what is the performance with 1% loss?
Repeat with 3 puts....
This will capture the range of higher vol, low vol, rising stock and falling, call-side and put-side; it's very simple to do; it will show you (and teach you) a lot more than reading an Interwebs query.
Start with the capital necessary to control 100 shares.
If the stock gains 1%, what happens to your capital performance?
If the stock loses 1%, what happens?
Do the same with three calls (ITM, ATM, OTM) --
how much capital is needed?
what is the performance with 1% gain?
what is the performance with 1% loss?
Repeat with 3 puts....
This will capture the range of higher vol, low vol, rising stock and falling, call-side and put-side; it's very simple to do; it will show you (and teach you) a lot more than reading an Interwebs query.
The problem with stock options is the time decay. You want to buy more time to give your trade a chance to work out. Also, options 3 months out gives you the opportunity to maximize your trades if you latch into a strongly, trending stock. Of course, you want winners several multiples of your losers to compensate for the smaller losing trades.
I have similar strategies and similar issues, as I'm not yet processing intraday options data and cannot backtest those, so not sure of the best approach using options. I have a friend who multiplies his money in this strong market by buying OTM calls about 1 month out on anything uptrending, including on pullbacks. This is also how all those kids turn a few $hundred to $thousands on Robinhood, of course with sheer luck. But it might be a usable strategy if you can indeed predict recovering uptrend.
I've been thinking about buying near-ATM call spreads on those, but sometimes the stock doesn't move up fast enough and those spreads lose value even when the stock is up.
Though I found that during those pullbacks the volatility is so high that calls are very expensive while selling straddles about 2-4 weeks out on those may actually work best. They seem to make money even when the stock moves strongly in either direction after a pullback. Not sure whether this will work often enough. Iron condors may also be usable for limiting risk.
Here is a sample chart I've discussed with someone when recently we caught KMX during a pullback and bought calls, while later it continued going down and it turned out that selling a straddle would've worked much better, even with the stock being on the move. The best thing is that direction doesn't even matter, while if the stock stops moving then that's even better.
Though it may be best to come up with options-only strategy tested specifically for trading options.
PS. Obviously this was not an uptrending stock, so it's a different strategy. We've waited a day after the initial drop for the price to settle before buying calls.
I've been thinking about buying near-ATM call spreads on those, but sometimes the stock doesn't move up fast enough and those spreads lose value even when the stock is up.
Though I found that during those pullbacks the volatility is so high that calls are very expensive while selling straddles about 2-4 weeks out on those may actually work best. They seem to make money even when the stock moves strongly in either direction after a pullback. Not sure whether this will work often enough. Iron condors may also be usable for limiting risk.
Here is a sample chart I've discussed with someone when recently we caught KMX during a pullback and bought calls, while later it continued going down and it turned out that selling a straddle would've worked much better, even with the stock being on the move. The best thing is that direction doesn't even matter, while if the stock stops moving then that's even better.
Though it may be best to come up with options-only strategy tested specifically for trading options.
PS. Obviously this was not an uptrending stock, so it's a different strategy. We've waited a day after the initial drop for the price to settle before buying calls.
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I have similar strategies and similar issues, as I'm not yet processing intraday options data and cannot backtest those, so not sure of the best approach using options. I have a friend who multiplies his money in this strong market by buying OTM calls about 1 month out on anything uptrending, including on pullbacks. This is also how all those kids turn a few $hundred to $thousands on Robinhood, of course with sheer luck. But it might be a usable strategy if you can indeed predict recovering uptrend.
I've been thinking about buying near-ATM call spreads on those, but sometimes the stock doesn't move up fast enough and those spreads lose value even when the stock is up.
Though I found that during those pullbacks the volatility is so high that calls are very expensive while selling straddles about 2-4 weeks out on those may actually work best. They seem to make money even when the stock moves strongly in either direction after a pullback. Not sure whether this will work often enough. Iron condors may also be usable for limiting risk.
Here is a sample chart I've discussed with someone when recently we caught KMX during a pullback and bought calls, while later it continued going down and it turned out that selling a straddle would've worked much better, even with the stock being on the move. The best thing is that direction doesn't even matter, while if the stock stops moving then that's even better.
Though it may be best to come up with options-only strategy tested specifically for trading options.
PS. Obviously this was not an uptrending stock, so it's a different strategy. We've waited a day after the initial drop for the price to settle before buying calls.
Who is "we"?
Sorry, me and a friend that’s trading OTM calls. He asked me to help generate signals for his trades and we’re testing them, but personally I’m not sure whether buying OTM is a good approach or whether I can find applicable trades. I didn’t find many ways to detect repeatable stock trends that would survive certain years like 2008, Trump tweets, etc. May need to look into commodity futures in the future.
(while I can easily find stock drops like above with potential for recovery)
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Have a look at my journal on here @ETFswingTrader
You can see the results of swing trading using AtM and OtM.
Spreads seem to work better, but if using OtM options to gain directional eposure you'll need a strong sense of where the security will move to.
You can see the results of swing trading using AtM and OtM.
Spreads seem to work better, but if using OtM options to gain directional eposure you'll need a strong sense of where the security will move to.