Noob question about options?

Quote from konviction:

I thought the title of this thread was appropriate for my post, even though its not really related to the OP's. I hope he doesn't mind :)

My first question is 1) For most of you guys trade options regularly do use strategies that are mostly directional, or market neutral ? and 2) If you say market neutral, why?..if you're unsure of the direction, isnt it just best to stay out of the market at that point?

Also I've been reading "Get Rich With Options second edition" by Lee Lowell. He's a big fan of DITM calls/puts and says why would you ever pay for stocks ever again if you can buy the options at 50% discount with 1.0 deltas? He makes it sound very attractive. Is it really all that and a bowl of cherries? If so I'm selling every stock I own right now! :p

kon
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I trade both directional and market neutral. When you trade market neutral, it doesn't mean that you don't have a view, it means that you have a view on the market trading sideways or a view on volatility. So if options allow you to express that view, why would you want to stay out!?

Deep ITM options can be used as a stock substitute, but options expire, stocks don't. Also, deep ITM options are very illiquid and have wide bid-ask spreads. So it's not really a bowl of cherries, if you ask me, but like every strategy, they do have their place and time. The key is figuring out which strategy to use and when.
 
Quote from konviction:

This could be solved by use of limit orders I'd imagin?
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A limit order doesn't guarantee an execution. If you need to get in/out then you are forced to pay a lot in slippage.
 
Quote from konviction:

Also I've been reading "Get Rich With Options second edition" by Lee Lowell. He's a big fan of DITM calls/puts and says why would you ever pay for stocks ever again if you can buy the options at 50% discount with 1.0 deltas? He makes it sound very attractive. Is it really all that and a bowl of cherries? If so I'm selling every stock I own right now!
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An advantage of deep ITM options is less risk in the event of an underlying collapse. But you're still going to get clobbered by the initial drop since the delta is 1. Another adv. is leverage (2 deep ITMs is roughly equivalent to margining the stock). Disadvantage is aforementioned wide spread and illiquidity.

Either way, you still have to get the direction right.
 
In essence, the higher the delta, the less liquid the option contract?

If this is the case, why is that?...wouldn't traders want an option that follows the underlying as close as possible? Why buy an option that has a delta of only .10?..whats the point in just making 10% of the stocks price movement?
 
Quote from konviction:

In essence, the higher the delta, the less liquid the option contract?

If this is the case, why is that?...wouldn't traders want an option that follows the underlying as close as possible? Why buy an option that has a delta of only .10?..whats the point in just making 10% of the stocks price movement?
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Leverage. The deeper ITM you go the less leverage and vice versa. And, no, traders don't necessarily want an option that follows the underlying as close as possible.
 
Quote from konviction:

If this is the case, why is that?...wouldn't traders want an option that follows the underlying as close as possible? Why buy an option that has a delta of only .10?..whats the point in just making 10% of the stocks price movement?
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That's what makes a horse race. Some like good chance of a more modest payout. Others like the long shots.
 
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