Large options spread

[Dna7272]

Hi, I have never traded options, but successfully traded stocks. From time to time I think about trading options. But what always stops me from doing it is the fact that options spread is way larger than stocks spread. Plus it looks like there's less liquidity. For example, some S&P constituents options have less than 1000 (with strike price near the current stock price) volume a day.

Based on this fact i cannot understand how you guys trade options. Because of the large spread you lose a lot of money, and it is veeery hard to find an edge that can justify the costs.

Is there something that i don't understand? Can anyone explain me how people make money with options?

 

[R1234]

One of the strategies I do is day/swing trading options. I keep records of how the options PNL correlates to a theoretical PNL of trading the underlying. The correlation between the two is very tight, only difference is the return magnitude. The trick with options is to always transact at the midpoint with limit orders. For example, I bought an ATM put on UNG late in the day Friday where the bid/ask was around 5 to 7 cents wide. I got filled on my midpoint limit order in a few seconds. There's 'hidden' liquidity between the bid/ask in options.

 

[spy]

Is there something that i don't understand?

Yes

Ok, sorry... I shouldn't be so facetious.

Because of the large spread you lose a lot of money

With regard to this, you have to consider there's a difference between making and taking liquidity. Liquidity is valuable, as you're pointing out, and those who can provide it get compensated. You start to think not only of what's being traded, but how it's traded.

 

[newwurldmn]

Hi, I have never traded options, but successfully traded stocks. From time to time I think about trading options. But what always stops me from doing it is the fact that options spread is way larger than stocks spread. Plus it looks like there's less liquidity. For example, some S&P constituents options have less than 1000 (with strike price near the current stock price) volume a day.

Based on this fact i cannot understand how you guys trade options. Because of the large spread you lose a lot of money, and it is veeery hard to find an edge that can justify the costs.

Is there something that i don't understand? Can anyone explain me how people make money with options?

you are right. The only reason to trade options is that in theory volatility is easier to predict than stock prices.

 

[spy]

you are right. The only reason to trade options is that in theory volatility is easier to predict than stock prices.

I wouldn't say it's the only reason. With options you can more easily eliminate certain kinds of risks and only focus on the ones you have some insight on, or expectation of.

For example, if you think an underlying asset won't go up or down you can structure a trade to profit from the stagnation. Of course this is a vol play, so a good contrast to stocks, but not a great example of my point. A better example would be that you can invest in time, or the lack thereof. Ditto for rates, but vol is far and away the biggest and most common attribute considered.

You also get a way to more easily lever your investment. Of course we're digressing a bit from the OP's question.

 

[newwurldmn]

I wouldn't say it's the only reason. With options you can more easily eliminate certain kinds of risks and only focus on the ones you have some insight on, or expectation of.

For example, if you think an underlying asset won't go up or down you can structure a trade to profit from the stagnation. Of course this is a vol play, so a good contrast to stocks, but not a great example of my point. A better example would be that you can invest in time, or the lack thereof. Ditto for rates, but vol is far and away the biggest and most common attribute considered.

You also get a way to more easily lever your investment. Of course we're digressing a bit from the OP's question.

you can trade rates more precisely a thousand other ways.

you can lever but you still have a volatility view when you buy an option.

 

[spy]

you can trade rates more precisely a thousand other ways.

you can lever but you still have a volatility view when you buy an option.

I'm not getting into a pissing contest here, find @TheDawn for that. I just wanted to point out that vol is not technically the only factor at work. It may be the most important, sure. But... it's not the only one; which is what you somewhat implied.

Concede now! Lol... j/k, listen to @newwurldmn, I'm just a humble software engineer. We don't know anything compared to the analytic gurus who could bury us with nothing more than a pencil and some paper; maybe an abacus or slide rule for the "rough stuff". Seriously, IDK how they work their magic!

 

[swingtrader123]

Options trading gives you better return on capital then out right purchases of stock. In addition, options gives you flexibility. If you are very bullish/bearish on a stock, you can purchase a option outright. If you are somewhat bullish/bearish, you can either long or short a options spread. If you believe the stock moving sideways, you can do an iron condor. Very active stocks/ETFs have lower bid/ask spread, so just use options on those.

 

[misterkel]

you are right. The only reason to trade options is that in theory volatility is easier to predict than stock prices.

Really? Assymetric payout, hedging premium collection, discounted entry into underlying (selling puts), underlying proxy (DITM calls, or puts or synthetics).
Many,, many reasons to trade options.

 

[spy]

You're doing God's work @misterkel but don't feel obligated to fight my battles for me. AHAHAHhAahhah!

Just kidding, would it be possible, just this once (dear God please!) to avoid the pissing contests and stay on-topic?

The title is:

Large options spread​

and it seems the crux of the question is:

"how you guys trade options. Because of the large spread you lose a lot of money"​

My pea sized little brain can only come up with... 1) trade inside the spread and 2) overcome the spread with some other edge. Bueller?

Really? Assymetric payout, hedging premium collection, discounted entry into underlying (selling puts), underlying proxy (DITM calls, or puts or synthetics).
Many,, many reasons to trade options.