Looking for decent options strategy for high-probability stock trades

[TheBigShort]

Appears a waste of time. Fun from a mental masturbation perspective but unproductive for the means you are seeking. Your methodology apparently involves some form of spread trading on the underlying.

1- Delta appears essential to that strategy. If you try to recreate those deltas using a derivative you will not do it at an advantage to trading the underlying and only add slippage (particularly at.02 gains, not something you need).

2- If you try to leverage, that leverage ain't free (theta), and picking up delta out-of-the-money subjects that delta to various forces you aren't familiar with and could at times get pretty funky, taking something you understand and that works for you and moving you into a product presently out of your comfort zone.

Dude,
why are you so negative?
There are countless of ways to make money. Some have the quant skills to take advantage, some have the geological location, some are just in the right place at the right time.

 

[ironchef]

Dude,
why are you so negative?
There are countless of ways to make money. Some have the quant skills to take advantage, some have the geological location, some are just in the right place at the right time.

Negative maybe but true.

If OP is counting on 0.02% stock movement to make money, option is not it. Theta, gamma, Vega will overwhelm the changes in delta.

 

[guru]

Negative maybe but true.

If OP is counting on 0.02% stock movement to make money, option is not it. Theta, gamma, Vega will overwhelm the changes in delta.

Generally I agree, though at 0.02% I just wouldn't want to lose, while at 0.60% (average win for this strat) I'd like to do better than with pure stocks.
I've created a spreadsheet with various option combos to compare potential results, and right now I'm finding that possibly selling naked ATM puts (or calls) to the opposite direction of my predicted movement might work, in the way of scalping little Theta when the stock doesn't move, while also benefiting when the stock does move somewhat, while when losing and later being assigned stock - my cost would be lowered by the extrinsic value.

Though I'm not sure yet that the %returns would be better when selling options for such stock-specific strategies. I'm assuming I'd need to work on options-specific algos, which would also result in different entry and exit points (price & time), time held, etc. (big task to work on in the future)

 

[KevMo]

There all kinds of potential data sets that can be extracted from the info you used to make this post.

Spitballing here but...

Seek out some central tendencies in your variables. Obviously, if your system fires winners quickly you're gonna want the gamma in the weeklys, especially if your system cuts losses small fast losses. When you find that just stick w/those signals. Eliminate the remainder. I suppose optimizing how much delta to buy is up to you, how often you have to roll, and the size of your bankroll.

G/L

I usually throw-in my two cents and try to answer many questions, but this time I do have a question of my own.
Let's say that I have a long/short stock trading strategy that wins 90% of the time ( trading liquid stocks like AAPL, SPY, QQQ), but the wins are very small, 0.60% on average, and can be as low as 0.02%, and actually that's what I've been getting during last few days. Holding period is about 24 hours on average, but on rare occasions it can be up to 3 weeks. Most of the trades are held 1-2 days though.
The strategy works great for stocks, but I'm looking for ways to enhance it using options. I've been playing with buying plain OTM calls (or occasionally puts), but they quickly lose value and something like 0.10% stock price move in my favor within 24 hours would still result in losses. Buying ATM calls means putting more money at risk, while they also lose due to Theta when the stock doesn't move much.
The question then is, what may be other good options strategies worth considering, or possibly used by some of you in similar situations?
(I can come up with and test couple more ideas, but being focused on stocks at the moment I'm drawing blank in terms of options. I may also try selling calls or put spreads next. May also play with butterflies.)

 

[kj5159]

If you have a high probability of a small move like that, then why not go with a strategy that makes money as long as the underlying doesn't have a substantial move?

 

[guru]

If you have a high probability of a small move like that, then why not go with a strategy that makes money as long as the underlying doesn't have a substantial move?

Sometimes the moves can be larger, say 2%, so the average of 0.60% accommodates both tiny moves and a bit larger ones. Sometimes it can be 30 minutes where the 0.60% move can increase one of the options value by 50%+. So that’s why I was thinking of buying calls, but then I’ve lost when the stock didn’t move much the whole day, or went down first before recovering.
But you’re making good point, so I’ll look into selling straddles or strangles as well. May just need to adjust my strategy and be able to test it with options...

 

[motterpaul]

I usually throw-in my two cents and try to answer many questions, but this time I do have a question of my own.
Let's say that I have a long/short stock trading strategy that wins 90% of the time ( trading liquid stocks like AAPL, SPY, QQQ), but the wins are very small, 0.60% on average, and can be as low as 0.02%, and actually that's what I've been getting during last few days. Holding period is about 24 hours on average, but on rare occasions it can be up to 3 weeks. Most of the trades are held 1-2 days though.
The strategy works great for stocks, but I'm looking for ways to enhance it using options. I've been playing with buying plain OTM calls (or occasionally puts), but they quickly lose value and something like 0.10% stock price move in my favor within 24 hours would still result in losses. Buying ATM calls means putting more money at risk, while they also lose due to Theta when the stock doesn't move much.
The question then is, what may be other good options strategies worth considering, or possibly used by some of you in similar situations?
(I can come up with and test couple more ideas, but being focused on stocks at the moment I'm drawing blank in terms of options. I may also try selling calls or put spreads next. May also play with butterflies.)

My guess is that you are buying puts or calls that are too close to expiration. You are getting hit by GAMMA - which is the time just before expiration when most of your premium is getting taken.

If you have good stocks and you want to trade them directionally with options then the best idea is to buy them about 20 to 30 DTE - because there is no GAMMA and very little Theta effect that far out, so they will move about the same directionally as the underlying.

To gauge how many to buy - check the Delta. In theory, if you buy 2 calls at 50 delta (100 delta combined) you should get the same return as you would by owning the stock. This works best when you buy options as close to ATM as possible.

If you buy options too close to DTE, or too far OTM, you will find other factors (IV especially and also theta) will mess with your strategy. Like I said - pick one strike, very close to ATM, and buy enough to equal 100 delta and it is almost like owning the stock.

 

[motterpaul]

Oh - another "option" is to buy the futures /ES (for SPX, for example). These tend to have far less premium decay when you are close to expiration. You can buy/ES (an SPX put or call) for about $250 on the same day as expiration. You will still experience the Gamma in the last couple hours, though. Best to do it early in the day.

 

[motterpaul]

I meant more money than OTM calls. Both ATM and OTM calls can lose their total value, so I may lose, for example $200 on an ATM call vs $50 on an OTM call if they both decay to nothing.
Though I've been testing options expiring in 2-3 days and sometimes made 20%-60% in 30 minutes, but they lose their value super quick if the stock doesn't make a sufficient move and I have to wait longer.
Now I looked at 3 week ATM calls and they don't look exciting either. I just did couple QQQ trades since yesterday and made ~0.30% on the stock, while could make maybe 8% on an ATM call. However, if the stock dropped, then I could lose 10%-100% value of that call, even when the stock later recovers to its previous level. And many times I wouldn't even get the 8% return if the stock moves by only 0.10% or less.
Anyway, any plain calls seem to be great for large moves when you can make 20%-100%+ on a trade and afford to lose the whole value of the call when it doesn't go your way. And I will continue comparing my stock trades to plain calls.
But I guess I'm also looking for something more creative.

QQQ is the slowest moving underlying I ever tried. I suggest you try the /NS NasDaq mini futures. Or the /ES SPX futures. These things move fast and you can make buck in a short time if you buy 3 or 4. If you want to be safer, stick to just one position at a time.

And DO take profits. these indexes are very directional - until they aren't. If you are having a bad day it is better just to quit.

 

[tommcginnis]

To gauge how many to buy - check the Delta. In theory, if you buy 2 calls at 50 delta (100 delta combined) you should get the same [gain] as you would by owning the stock. This works best when you buy options as close to ATM as possible.

In all kindness, this single sentence was the only part of three separate posts that is correct.